Why NVIDIA’s Earnings Point to a Bullish Future for Pure Storage

Key Points

• Pure Storage stock is down sharply despite a solid earnings report; like NVIDIA it’s all about the guidance.
• However, based on statements made by NVIDIA’s CEO on the earnings call, Pure Storage’s forward guidance may be too conservative.
• Analysts are lowering their price targets but confirming a Moderate Buy rating.  

Pure Storage Inc. NYSE: PSTG delivered earnings on the same day as NVIDIA Corp. NASDAQ: NVDA. While the company’s report didn’t garner enough interest for a watch party like that of NVIDIA, there are a couple of points from NVIDIA’s earnings report that can apply to your outlook for Pure Storage.  

Pure Storage provides data storage and management technologies, products, and services to a global customer base. Data centers are needed for the growth of artificial intelligence (AI), which is why investors have driven the PSTG stock price up 67.6% in 2024.  

At first glance, the report's headline numbers were fine on the top and bottom lines. Revenue of $763.77 million was above estimates and 11% higher year-over-year (YoY). The bottom line was even better, with non-GAAP earnings per share (EPS) of 44 cents coming in 29% higher YoY. The company’s non-GAAP gross margin was flat at 72.8%.  

Pure Storage's Earnings Report: Good Is Not the Same as Great 

However, like NVIDIA and other technology stocks, Pure Storage stock dropped sharply after the report. As of midday trading the day after earnings, the stock is down 14.5%.  

The company reiterated its guidance on the top and bottom lines. However, Pure Storage lowered its guidance for total contract value (TCV) sales for two of its subscription service offerings by $100 million from $600 million to $500 million. That lowers YoY growth estimates in that category from 50% to 25%.  

That’s not the kind of guidance that a company can get away with when it has forward price-to-earnings (P/E) of 127x. But once again, if you look at the NVIDIA earnings call, you may have more reason to be bullish on Pure Storage.

Pure Storage May Be Setting the Bar Low 

One reason NVDA stock is selling off is the company’s future YoY comparisons, which will be more difficult. Pure Storage has faced difficult comparisons with mixed results in the past four quarters. 

One way around that is to lower expectations. This wouldn’t be without merit. Heading into earnings season, a major concern weighing on investors was the extent of CAPEX spending on AI from companies like data centers that need to buy NVIDIA products.  

An accurate, albeit simplistic, way to look at this is lower NVIDIA demand would be bearish for Pure Storage. However, that wasn’t what investors heard from NVIDIA chief executive officer Jensen Huang, who made his case for why data centers and hyperscalers will need to continue spending on AI.  

The takeaway is that data centers are only just beginning to transition to the accelerated processing required for AI and machine learning (ML). That’s not only bullish for NVIDIA, but for companies like Pure Storage and its Purity storage platform.  

On the earnings call, Pure Storage chief executive officer (CEO) Charles Giancarlo highlighted the growing need for GPUs along with specialized storage for enterprise customers while mentioning that the company’s customer base includes approximately 60% of the Fortune 500, including over 100 AI customers. Notably, however, the company has yet to secure its first hyperscaler client. But it does expect to do so by the end of the calendar year. 

“Pure is seeing early success in all three of these AI-based opportunities, and we can address them all with our unified Purity platform...The Pure Storage platform strategy provides a unified and integrated data storage and delivery system across customers' various data environments. It facilitates seamless management and data access across data centers and the cloud, with simplified universal policies and management.” 

Analysts Are Lowering Their Price Targets 

Purely based on its relative strength indicator (RSI), PSTG stock looks oversold. As of this writing, it trades at $50.88 per share, which puts it near a line of support it confirmed in May 2024.  

Taking a longer-term view, your decision to buy Pure Storage stock may be influenced by the analysts’ outlook. Since the company reported earnings, the Pure Storage analyst forecasts on MarketBeat show eight analysts lowering their price targets, with several of those targets coming in below the consensus price of $66.40. UBS Group is particularly bearish, with a price target of $45, down from $47.  

However, none of those analysts have changed their rating on the stock, which retains its consensus Moderate Buy rating.