3 Reasons Pure Storage Stock Was Downgraded

Maxim Group downgraded of Pure Storage Inc PSTG on Monday. The firm believes the smart bets on IT Departments having inertia will eventually prove short-sighted.

Accordingly, the firm downgraded shares from Buy to Hold and the price target goes from $20 to $15. Elsewhere, Baird maintained its Neutral rating and $14 price target for the shares of Pure Storage.

Short-sighted Bets

Analyst Nehal Chokshi of Maxim Group believes management will continue to place bets that IT departments have inertia. This is despite the channel checks indicating that FlashArray differentiation remains high due to superior data reduction ratios the company is able to achieve relative to the bellwether All Flash Arrays.

The analyst said Pure Storage remains a loved OEM with on-premise IT departments that resist change. By betting on IT departments resisting all other changes other than movement to data management simplicity and All Flash Arrays, the analyst indicated the company is betting against IT departments looking to simplify overall IT operations by using hypervisor as the substrate for automation, and IT departments leveraging the benefits of public clouds, while maintaining ownership of IT.

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Lack Of Depth Of Data Management Presents Risk

Additionally, Maxim Group said the lack of depth of data management features presents risk to meeting guidance of accelerating year-over-year growth.

"[W]e note that the level of features that FlashBlade currently carries is still relatively limited, including missing the capability of Active Clusters that PSTG just introduced for their five year older product FlashArray, which in our view highlights that FlashBlade likely still has a multi-year path to becoming fully matured," the firm said.

Given the firm's view that FlashBlade still has a long way to mature, it sees risk to the guidance assumption that FlashBlade is continuing to increase at two times year-over-year rate. The firm noted that the company's 2018 guidance assumes accelerating revenue growth through the course of the fiscal year from 31 percent in the April quarter to 34 percent in July quarter, 37 percent in the October quarter and 44 percent in the December quarter.

Based on the Analyst Day guidance, the firm increased its share count for DCF-based valuation from 189 million to 238 million. Accordingly, the firm lowered its price target from $20 to $15.

Trade-Long Into The Quarter

Baird analyst Jayson Noland attributed his Neutral rating to continued concerns over the increasingly competitive AFA Storage market. However, the analyst sees Pure Storage as a trade-long into the quarter as his channel work has trended positive amid lower investor expectations.

The analyst expressed relief that Pure Storage is not overexposed to Fed or the EMEA which appear to be areas of current spending uncertainty. Additionally, the analyst said Dell's integration of EMC continues to be challenged.

The company is scheduled to report its second quarter results on August 24, with the consensus estimates calling for non-GAAP earnings per share of 14 cents and revenues of $218 million, up 34 percent and 20 percent, respectively, year-over-year.

While noting Pure Storage has a back-end loaded year, Baird said it thinks a strong third quarter guidance could increase investor confidence in the company hitting its $1 billion target for 2018.