Pure Storage: Baird Stays On The Sidelines, Names Cisco Systems As Possible Buyer

"We expect the AFA market to outpace current growth expectations but we also believe the competitive environment has aggressively heated up per channel feedback," analyst Jayson Noland wrote in a note.

Noland, who started coverage of the stock with a Neutral rating, said Pure "developed better compression and deduplication algorithms on top of consumer grade NAND flash setting a new bar for price/GB." The Mountain View, California-based company also posted strong product gross margin despite aggressive pricing.

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However, Baird's field work suggests Pure is likely to lose share going forward. Per Gartner, Pure comprised 15 percent of the AFA market in 2015. Noland expects the AFA market to be approximately $5 billion in 2016 growing to about $13 billion by 2019.

"We are modeling 11 percent share in C19. We expect this to be a controversial stance, but it's quite common for the incumbents to eventually narrow the competitive advantage of the leading pure-play and use aggressive pricing to better defend install base. We think this is exactly what's going on in the field today," Noland noted.

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On the M&A front, Noland highlighted that Pure has "struggled somewhat" outside the United States, and this could be rectified by a large, strategic buyer.

"We do not view Dell, HP or NetApp as strategic buyers of Pure. We view Cisco and maybe Hitachi as possibilities. We believe Cisco wants to do more in the Storage market and is likely considering alternatives, especially given the upcoming Dell acquisition of EMC," Noland added.

The analyst expects a loss of $0.71 a share for 2017 and a loss of $0.43 a share for 2018.

At time of writing, shares of Pure Storage was up 4.43 percent on the day at $10.60. Noland has a price target of $12.