Pure Storage Hits 52-Week High: What's Behind The Rally?

Shares of Pure Storage, Inc (NYSE:PSTG) rallied to a new 52-week high of $23.19 on May 10, closing marginally lower at $23.13. The company has a market capital of $4.84 billion.

Notably, the stock has returned 103.8% in the past year, substantially outperforming the industry’s rally of 23.3%. The momentum can be attributed to robust adoption as well as partnerships and collaborations that aid product innovation. Moreover, improving cash position bolsters future growth prospects.

Pure Storage displays an impressive earnings surprise history. The company outpaced the Zacks Consensus Estimate in the trailing four quarters, delivering a positive average earnings surprise of 53.24%. The company has a long-term expected EPS growth rate of 15%.

The Zacks Consensus Estimate for current quarter revenues is pegged at $251.52 million, representing a year-over-year growth of 37.72%.

Robust Adoption

Strong product portfolio including the likes of FlashArray, FlashStack and FlashBlade business segments aid Pure Storage top-line. In the last reported quarter, the company added more than 500 new customers, bringing the total base to 4500 organizations and reflecting an increase of 50% from the year-ago quarter.

Additionally, the company’s data platform for cloud is gaining traction. Per a ResearchandMarkets report, cloud storage market is anticipated to grow at a CAGR of 29.73% from $25.17 billion in 2017 to reach $92.49 billion in 2022. The company is well poised to capitalize on the opportunity.

Pure Storage continues to focus on three major aspects, namely increasing cloud customer base, solidifying the position of its next generation workload related core data infrastructure and tapping large enterprises as they “cloudify” their on-premise IT infrastructure.

Partnerships and Collaborations: Key Catalyst

Cisco’s tie-up with the company’s FlashStack has significantly accelerated overall converged infrastructure and integrated systems markets. FlashStack is well-positioned for the future as the company continues to invest with its partners in full stack automation and simplicity.

Management is optimistic about scalable storage solutions in an era when the world is typically being driven by big-data, artificial intelligence (“AI”) and data analytics-based information.

Pure Storage strengthened its partnership with NVIDIA (NASDAQ:NVDA), a dominant player in AI related computation, to expand product offerings. The company recently released AIRI in collaboration with NVIDIA.

The company claims AIRI to be a first-of-a-kind AI ready infrastructure. AIRI will cut short the time required for data to generate valuable insights significantly, consequently accelerating innovation.

Per Gartner, 80% of enterprises are anticipated to deploy AI within 2020, which enhances the prospects of AIRI.

Improving Cash Position

Pure Storage recently announced plans of offering $450 million of convertible senior notes in a private placement. The interest rate, conversion rate and certain other terms of the notes are yet to be determined. Interest on the notes will be paid semi-annually and mature in 2023, subject to customary closing conditions.

The enhanced capital deployment reflects Pure Storage’s strong balance sheet and confidence in long-term business prospects. The company exited the year ended Jan 31, 2018 with cash and cash equivalents of $183.7 million.

The company has a strong balance sheet, which will help it in capitalizing on investment opportunities and pursuing strategic acquisitions, further improving growth prospects. Moreover, the senior notes offering will lower its cost of capital, consequently strengthening balance sheet and supporting growth.

Positive free cash flow for the full-year ended Jan 31, 2018 was reported for the first time in the company’s history at $7.7 million, compared with ($61.2 million) fiscal 2017. This can be attributed to strong performance in the quarter and employee stock purchase worth $11.5 million in the fourth quarter of fiscal 2018.

Underlying Risks

The aforementioned points will enable Pure Storage to remain afloat in difficult times. However, the company continues to face intense competition due to the presence of major players such as Amazon (NASDAQ:AMZN) Web Services (“AWS”) and Microsoft (NASDAQ:MSFT) Azure in cloud storage.

Zacks Rank and Key Picks

Pure Storage carries a Zacks Rank #3 (Hold).

Some better-ranked stocks trading at 52-week high include Citrix Systems, Inc (NASDAQ:CTXS) , NetApp, Inc. (NASDAQ:NTAP) and PTC Inc. (NASDAQ:PTC) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Citrix, NetApp and PTC are currently pegged at 9.05%, 10.34% and 38.22%, respectively.

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