Pure Storage Upside Margin Is Narrowing... But Why?

Pure Storage Inc (NYSE: PSTG) reported robust results for the April quarter, and announced its guidance ahead of expectation. Oppenheimer’s Ittai Kidron maintained a Perform rating for the company, saying that although Pure Storage continued to gain market share and grow at an impressive rate, “the margin of upside in its results/guidance has narrowed.”

Pure Storage reported its sales at $139.9M and loss per share at $0.22. Both figures were better than the Street expectations for sales of $138.2M and loss per share of $0.23. Product GM improved +5.2pts y/y to 69.6 percent.

Guidance Shows Limited Upside

Analyst Ittai Kidron pointed out that despite the impressive performance, the company’s F2Q17 guidance was only marginally ahead of consensus and management didn't indicate why the guidance reflected little upside. Moreover, management eliminated the annual guidance.

Related Link: Pure Storage's Small Q1 Beat "Not A Thesis Changer"; Stock Slips 21%

Kidron cited some of the negatives as:

• The AFA landscape becoming increasingly competitive.
• Investment in headcount being front-end loaded in FY17.
• Negative cash flows expected to rise in the July quarter.

“Why so little upside in guidance? Will be the question on investors' minds and unfortunately management has not provided a good answer. A more difficult macro backdrop and changes in competitive dynamics were noted, but even when given the chance to peg the lack of upside to these factors, management chose to stick to an "all is good" answer,” the analyst wrote.