Unveiling Pure Storage (PSTG)'s Value: Is It Really Priced Right? A Comprehensive Guide
With a daily gain of 4.72% and a 3-month gain of 16.78%, Pure Storage Inc (NYSE:PSTG) has been catching the attention of investors. However, despite the company's Loss Per Share of 0.02, the question remains: is the stock significantly overvalued? This article aims to answer that question through a detailed valuation analysis of Pure Storage (NYSE:PSTG). Continue reading to understand the intrinsic value of the company.
Company Introduction
Pure Storage Inc is a US-based company that provides an enterprise data storage platform. The company's platform has transformed businesses through a dramatic increase in performance and reduction in complexity and costs. Pure Storage generates revenue from product sales, which include integrated storage hardware and embedded operating system software, and subscription services. The company's current stock price is $40.17, while its GF Value, an estimation of fair value, is $29.2. This discrepancy suggests that Pure Storage may be significantly overvalued.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value. It is derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
For Pure Storage (NYSE:PSTG), the stock appears to be significantly overvalued according to the GF Value. The stock's current price of $40.17 per share gives Pure Storage a market cap of $12.40 billion, which is significantly higher than its GF Value. Consequently, the long-term return of Pure Storage's stock is likely to be much lower than its future business growth.
Assessing Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss to investors. To avoid this, it's essential to review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. Pure Storage has a cash-to-debt ratio of 4.49, which ranks better than 69.53% of 2353 companies in the Hardware industry. The overall financial strength of Pure Storage is 7 out of 10, indicating that its financial strength is fair.
Evaluating Profitability and Growth
Investing in profitable companies is less risky, especially those with consistent profitability over the long term. Pure Storage has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $2.80 billion and Loss Per Share of $0.02. Its operating margin is 0.45%, which ranks worse than 65.4% of 2422 companies in the Hardware industry. Overall, the profitability of Pure Storage is ranked 3 out of 10, indicating poor profitability.
Growth is probably the most important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Pure Storage is 7.7%, which ranks better than 60.03% of 2317 companies in the Hardware industry. However, the 3-year average EBITDA growth rate is 0%, which ranks worse than 0% of 1941 companies in the Hardware industry, indicating poor growth.
ROIC vs WACC
Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, the return on invested capital should be higher than the weighted cost of capital. For the past 12 months, Pure Storage's return on invested capital is -0.02, and its cost of capital is 9.96, suggesting that the company is not generating a satisfactory return on its capital.
Conclusion
In summary, the stock of Pure Storage (NYSE:PSTG) appears to be significantly overvalued. The company's financial condition is fair, but its profitability is poor. Its growth ranks worse than 0% of 1941 companies in the Hardware industry. To learn more about Pure Storage stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
