Pure Storage: A Company That’s Here To Stay
Summary Pure recently sold a substantial issue of convertible debt. The interest rate was 0.125% with a premium of more than 32% at the time the debt was sold. Pure’s valuation continues to languish at levels suggesting a murky future for this high-growth company. All indications continue to suggest that guidance will prove conservative and growth will remain at elevated levels. This is one high-growth company that’s showing noticeable increases in profitability due both to growth and strong expense discipline. Pure: Borrowing money for 0.125% is a nice rate if you can get it! Last week, there were two interesting developments in the enterprise storage space. One of those events was the @NetApp (NASDAQ:NTAP) analyst day. The presentations portrayed a business emerging from a transition and achieving moderate long-term growth with strong margins and cash flow. The company announced that it was doubling its dividend, ratcheting up share repurchases and raising guidance for both revenue growth and earnings. The shares reacted positively in the context of the grim market action at the end of last week. The other event probably has slipped from the news headlines without many dots being drawn. Pure Storage (PSTG) announced that it was selling $500 million of debt (possibly $575 million depending on over-allotments) convertible at a price of $26.27/share. After Friday’s price action, the premium is 42%. The offering closed on April 9 and was the company’s first foray into the convertible debt market. The offering is uncannily similar to a similar transaction that Nutanix (NASDAQ:NTNX) made a few months ago. Of course, these kinds of offerings are not unknown in the tech space with companies such as Workday (WDAY) and ServiceNow (NOW) recently selling convertible debt that featured a zero interest rate and a large premium. At the time of the Nutanix transaction, its debt offered buyers a conversion feature with a 33% premium. Some investors look at dilution in considering offerings or convertible debt. The problem with that kind of analysis is that no one knows what Pure will do with the capital raise. Since it is cash flow positive and has about $600 million of cash and equivalents, it doesn’t need the money for operational purposes. It almost will surely use the funds to buy other companies and hence accelerate growth. So, dilution is really not an appropriate concept to consider in this situation. That being said, potential dilution in terms of an increase in outstanding shares would be a bit less than 9% – of course, for that to happen, the shares would have to reach more than $26/share at which time I doubt there would be much interest in dilution. It has been nearly six months since I last wrote about Pure. The shares are up by about 25% since that time. The IGV index has appreciated 12.5% over the same time span. Despite the appreciation, the shares have actually seen valuation metrics compress a bit because of the company’s rapid growth and substantial turn to profitability and to positive free cash flow. So, given the announcement of the offering, which I think is an interesting signpost, I thought it would be interesting to write about the company again. My conclusion at this point is essentially the same as my conclusion six months ago. Pure is an under-appreciated business, with excellent prospects within a market that has started to show encouraging growth. Pure continues to gain share and has exhibited signs of achieving leverage at scale. At this point, it’s starting to generate positive free cash flow, significantly sooner than had previously been I expected.