Pure Storage's Revenues: Back To Beating

Pure Storage's second-quarter results topped expectations on revenue and operating margin. Driven by strong demand in flash storage market, the company's third-quarter revenue guidance of $187 million–$195 million was well above BMO estimate of $178 million and in line at the midpoint with consensus of $191 million.

"While the results were impressive, we believe valuation adequately reflects expectations and we remain on the sidelines," analyst Tim Long wrote in a note.

The analyst also expressed his concerns on the company's below-than-expected gross margin of 66.3 percent gross margin as product gross margin of 67.4 percent fell well short of BMO's 69.5 percent estimate. For the third quarter, gross margins are expected to be 64 to 67 percent.

Related Link: JMP Reiterates Positive Rating On Pure Storage As Shares Up 12% On "Strong" Earnings

"Given the competitive environment, we believe discounting played a factor in the lower margins, and we are modeling the lower product margins to persist," Long noted.

Though Pure Storage is still about two years away from profitability, free cash flow is still expected to turn positive in the second half of next fiscal year.

Long raised his FY17 revenue and EPS estimates to $718 million/($0.62) from $679 million/($0.76). Given the higher revenue assumptions, the analyst upped his price target by $1 to $14, which assumes the stock trades at an EV/sales multiple of 3.0x his CY17 revenue estimate of $1.027 billion. Still being far from profitability, Long sees this valuation as fair.

"Given the high valuation, we believe revenue beats and/or a more aggressive path to profitability will be required for the stock to work," Long added.

At time of writing, shares of Pure Storage fell 3.13 percent to $11.46.

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