Back in December, the market was punishing Pure Storage (NYSE: PSTG) due to some short-term accounting effects distorting the way its reported metrics reflected the true growth of the business. I thought the stock looked like a compelling value.
While it hasn't been the highest-growth bet on the new digital memory demands of artificial intelligence (AI) systems (way to go, Micron), Pure Storage has been making some waves, rising by more than 50% so far in 2024. Is it still a great set-it-and-forget-it buy for the long term?
Pure Storage is a bet on AI memory as a subscription
Pure Storage competes in the data center and enterprise server market against companies like Dell and Hewlett Packard Enterprise. NetApp's subscription data storage model is more similar to Pure Storage's. However, while these other companies offer somewhat diversified lineups of computing and memory hardware types, Pure Storage is specifically dedicated to high-performance, flash-memory-based server storage solutions.
While most of its hardware finds application outside the generative AI market, the high-performance nature of its products has made Pure Storage a part of this thriving next-gen data center ecosystem.
Another unique aspect of the company is its extensive software capabilities built atop its systems. As such, it can offer storage as a subscription service, including access to continuously upgraded hardware via its flagship Evergreen//One subscription.
The high rate at which these recurring subscription revenues have been growing was actually the reason many investors had a downbeat outlook on Pure Storage stock late in 2023. Since the revenues from subscription sales are realized over time -- in contrast to the bigger up-front payments Pure Storage receives when it sells storage systems outright -- the company's surging subscription revenues were throttling its overall revenue growth rates last year. Fiscal 2023 sales rose only 3% due to this short-term effect.
Fiscal Year | Subscription Revenue Growth Rate | Subscriptions as a Percentage of Total Revenue |
|---|---|---|
2024 | 26% | 43% |
2023 | 30% | 35% |
2022 | 37% | 34% |
2021 | 33% | 32% |
2020 | 43% | 25% |
Data source: Pure Storage. *Pure Storage's fiscal years end in late January or early February of their respective calendar years. Fiscal 2024 ended Feb. 4, 2024.
It's no longer cheap, but...
The reason Pure Storage stock rallied in recent months is because of the new outlook for fiscal 2025, which is now underway. Management expects revenue growth to return to double-digit percentages, with full-year guidance calling for about 10.5%. That implies a slower-growth start to the year, followed by an acceleration to a greater-than-10% growth rate during the second half.
It's still not the fastest-moving AI stock around. However, the promise of a steady subscription-based revenue stream from what has historically been a wild data-center-memory hardware market makes it a unique investment.
And as the business gets larger, it's beginning to reach some really healthy operating profit levels. In fiscal Q4 2024, its generally accepted accounting principles (GAAP) operating margin was 7% on total revenue of $790 million. On an adjusted basis, operating margin was 20%. Management expects these rates of return to steadily chug higher as the company grows.
At this point, Pure Storage certainly isn't a steal of a deal, trading at 35 times this year's expected GAAP earnings per share. Nevertheless, organizations' data storage needs -- particularly their needs for higher-performance storage due to the demands of AI -- will grow in the decade ahead.
Pure Storage could be a great way to bet on a gradual rise in this market that doesn't expose you to some of the wild boom-bust cycles of actual memory chipmakers, such as Micron. I'll be happily sitting on my Pure Storage position for the long haul.
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Nicholas Rossolillo and his clients have positions in Micron Technology and Pure Storage. The Motley Fool has positions in and recommends NetApp. The Motley Fool recommends Pure Storage. The Motley Fool has a disclosure policy.
