Pure Storage stock fumbles for a rare buying opportunity

Key Points

• Pure Storage offers flash-based storage solutions to data centers and enterprise customers worldwide.
• Pure Storage shares tumbled 15% as it “lowered” its fiscal Q4 2024 revenues guidance on a $41 million delayed telco order and stronger than expected conversions to its consumption and subscription plans.
• Cathie Wood used the sell-off to double up on its position in the Ark Invest Next Generation ETF.

Enterprise flash data storage solutions provider Pure Storage Inc. NYSE: PSTG stock took a rare sell-off when it guided down its Q4 2023 revenue guidance, causing shares to collapse 15%. This comes as a shock, especially in light of competitor Network Appliances Inc. NASDAQ: NTAP 's EPS beat and raised estimates, resulting in a 16% stock price spike towards 20-year highs. They are both members of the Computer and Technology sector.

The company's products play a vital role in artificial intelligence (AI) platforms as evidenced by its roster of tier 1 clients, including Alphabet Inc. NASDAQ: GOOGL, Meta Platforms Inc. NASDAQ: META, Salesforce Inc. NASDAQ: CRM and Equinix Inc NASDAQ: EQNX.

Bookings versus revenue recognition

Companies that use a subscription model use a different form of revenue recognition versus bookings. Pure Storage's seemingly lowered guidance was just an accounting measure as the company has been transitioning customers over to its Evergreen//One consumptions software-as-a-service (SaaS) subscription pricing model from a product-centric model. This results in recognizing the revenue over the course of the life of the contract as in bookings rather than upfront at the time of purchase.

RPO and ARR are also valid growth metrics to watch.

The true growth can be seen in its remaining performance obligation (RPO) growth and annual recurring revenue (ARR) growth, which are up 30% and 26% YoY. The subscription model alleviates the heavy costs associated with upfront pricing, which enables more companies to onboard more easily with fewer financial constraints, which is essential in an uncertain macroeconomic environment. Pure Storage may have helped to alleviate investor sentiment by highlighting the “bookings" that videogame publishers and many software companies tend to use.

AI requires 3 key components.

Enterprises are in a mad dash to build out their AI platforms, which require three key physical components: AI chips, massive storage and fast connectivity. AI chips are dominated by Nvidia Co. NASDAQ: NVDA, which has nearly a 90% market share. AI platforms require oceans of data that need to be stored and accessible at instantaneous speeds. While hard disk drives (HDDs) can meet the data storage requirements at a relatively low cost, they don't match the speed of flash memory used in solid-state drives (SSDs) as they have no moving parts. Check out the sector heatmap on MarketBeat.

Seagate Technology Holdings plc NYSE: STX is a leader in HDDs with massive storage for cheap, but Pure Storage is the leader when it comes to speed and agility. Its FlashBlade storage solutions have speeds up to 100 GB/s and are highly scalable, with up to 100 petabytes (PBs) of capacity and 100 terabytes (TBs) throughout, with a lifecycle of 2.5 million hours.

This speed and capacity come at a premium price, which is also offset by using only 10% of the energy and space required for traditional HDDs. The combination of Nvidia AI chips and Pure Storage FlashBlade storage solutions drive the partnership between the two companies, super-fast AI processing with massive, super-fast storage.

Beat and Lowered

Pure Storage has a great fiscal Q3 2024 earnings report. Metrics were strong across the board, as it has typically been reported. In fact, revenues grew 12.8% YoY to $762.8 million, beating consensus analyst estimates of $761.49 million. This was an improvement versus its Q1 2024 revenue drop of 5%, which was attributed to the conversion to subscription model revenue recognition. Pure Storage earnings were 50 cents per share, beating analyst estimates by 10 cents.

Subscription services rose 26% YoY. Subscription ARR rose 26% to $1.3 billion. RPO grew 30% to $2 billion. Its FlashBlade sales hit record sales. Non-GAAP gross markets were 74%, and non-GAAP gross margins were 72.5%.

Lowering Guidance

Pure Storage was expected to generate $919 million in fiscal Q4 2024 and full-year 2024 revenues of $2.96 billion. However, they cut their guidance to $782 million for Q4 2024 and full-year 2024 revenues down to $2.8 billion, a $196 million shortfall.

There are several reasons for this, including a $41 million non-canceled order with a telco getting pushed into next year and the impact of Evergreen//One SaaS momentum causing a 4.5% headwind as the company continues to convert over to a subscription model. In other words, clients are transitioning to the subscription model faster than anticipated.

CEO underscores the stronger SaaS demand

Pure Storage CEO Charlie Giancarlo clarified the main reasoning for the guidance drop, "The outperformance of Evergreen//One this year has been significantly above our prior expectations, and we now expect this strong level of demand to continue through Q4. While this success is a long-anticipated and welcome expansion of our business model, its overperformance will affect near-term revenue."

Cathie Wood’s Ark Invest ETF scoops up shares.

Famed portfolio manager Cathie Wood of Ark Invest took the opportunity to scoop up more shares of Pure Storage. The Ark Invest Next Generation ETF doubled its position, acquiring $143,107 shares for $4.7 million on Nov. 30, 2023. This boosts its ownership to 316,239 shares valued at just over $10.5 million.

Pure Storage analyst ratings and price targets are at MarketBeat. Pure Storage peers and competitor stocks can be found with the MarketBeat stock screener.

 Daily double bottom

The daily candlestick chart on PSTG illustrates the double bottom at $31.00, which was tested on the Q3 2023 earnings gap down. The lowered Q4 revenue guidance caused investors to panic out of shares, but the $31.00 support level held firmly to stage a dead cat bounce.

This level held the earnings gap on June 1, 2023. Shares were able to bounce to $33.75 before a reversion. The daily relative strength index (RSI) continues to fall to the 40 band. The daily 200-period moving average support sits at $32.18. Pullback supports are at $32.05, $31.00, $30.10 and $29.66.