When Mr. Musk says there’s a one in a million chance we’re not in a simulation, it’s worth thinking about the idea a bit. Let’s assume we’re not in a simulation and we continue to design better and better alternate realities. We actively do this, and it’s called “the metaverse”. Obviously we’re going to make the metaverse better than the real thing otherwise it wouldn’t be attractive. Soon, we’d expect everyone to want to spend all their time in the Metaverse, and that would come true. In this reality, everyone would eventually get bored and start creating a new reality. It’s called a nested simulation, and there could be millions or even billions of them – a multiverse of simulations. Reality is the substrate on which these simulations run, and it’s probably boring as hell, Mr. Musk offered, as he looked warily at the stink joint Joe Rogan handed him.
What every simulation has in common is the data. At the molecular level, everything around us is made up of data. (It’s also largely nothing at the atomic level.) There is a growing need to store more and more data as this represents the ultimate way to optimize our own reality by creating digital twins. Synthetic biology is perhaps the most interesting technology we cover, but it also requires huge amounts of data to operate. Data is the backbone of everything, and we wouldn’t mind more exposure to it.
The appeal of Flash-Native
In our last article on Invest in data storage hardware stocks we proposed that traditional hard drives – like most data storage technologies – have had a long success that is coming to an end. Hard drives are now being replaced by flash technology and sold-sstate Dbanks (SSDs). Additionally, there is a technology called flash-native that allows vendors to create SSDs that are superior to what is traditionally offered. The leader in this space is an $8 billion company called Pure Storage (PURE) which has topped Gartner’s magic quadrant eight times in a row.
It’s easy to see when you consider that they built their entire storage platform from the ground up, including the software platform – Purity – which is a clear competitive advantage.
Pure’s flash drives require one-tenth the amount of power, space, cooling and e-waste of magnetic drives, and up to one-fifth the amount of power and cooling of competitive all-flash systems , and half of their required space. This does wonders for TCO spreadsheets, but who needs it when Pure’s drives cost less than hybrid storage arrays (a combination of SSD and HDD)? Pure’s hardware and services are selling like hotcakes, with quarterly revenue being quite cyclical over time.
Despite their rapid growth, revenues fell last year, with the company blaming Rona. It’s a believable excuse given that cheap data storage solutions should sell out. Looking ahead, Pure expects revenue to grow 20% this year to $2.6 billion, a small portion of the total $60 billion addressable market they are targeting.
Growth and profitability
We don’t like hardware companies because they always have to compete on cost, which means margins are constantly squeezed. If this happens to Pure Storage, they have a lot of blood in their turnip. With gross margins in the 60s and an already competitive storage solution, Pure Storage can afford to reduce its margins over time if necessary. In the meantime, they are judiciously diversifying their product offering into a service. About 35% of last quarter’s revenue came from Pure’s stthunderstorm-as-a–sservice offer (StaaS) is what is written on the box. Businesses store data and pay recurring fees based on usage instead of spending a whole lot of capital buying hardware, renting data center space, and then paying workers to maintain it.
We absolutely love companies that sell solutions that help other businesses save money. Pure Storage will be sure to find CTOs looking to switch from in-house data storage to a subscription offering to cut costs. Businesses with large data centers – pretty much every business these days – always need to increase capacity, and a low-cost provider with better features will come at the top of the list. It’s hard to see data storage demand dwindling in a bear market, although there’s always the possibility that some companies may go bankrupt. Pure does not provide us with granularity regarding customer numbers for subscription activity, or any other details outside of a run rate number – $849 million – which represents a 31% increase over to the previous year. (Fulfillment rate and revenue differ because the former reflects what everyone is contractually obligated to pay, while the latter reflects when they pay it.)
StaaS is not SaaS, so we don’t have health metrics like net retention rate. Instead, we’re told that the average customer who spends $1 with Pure Storage will spend $2 after 24 months of being a customer. For the top 25 customers, spending goes from $1 to $11 after just 18 months. When large customers increase their spending at such rates, it usually indicates that they are saving costs by doing so. With a net promoter score in the top 1% of all B2B companies, it’s hard to see customers deciding to stop buying hardware or services from Pure provided they remain competitive. More than half of all Fortune 500 companies are Pure Storage customers, showing just how widely adopted their solution is. Globally, adoption rates are lower, with approximately 72% of revenue coming from the United States.
Given the current bear market, it is important to assess survivability alongside growth prospects. Pure currently has $1.2 billion in cash and spent $11 million last quarter, a far cry from the $80 million they burned in the same quarter a year earlier. Even if we use the $143 million loss in fiscal 2022 as an indicator of cash burn, Pure Storage has a long trail ahead of it. Provided nothing drastic happens to their key raw input – the flash chips – it should go smoothly once the supply chain issues are behind them.
The competition
Because they built their entire technology stack from the ground up, Pure Storage can deliver superior functionality at a reasonable cost, which means businesses can save money by adopting the solution. An excellent Wikibon article published last year – Native Flash Architectures Power Next-Gen Real-Time Workloads – explains why Pure’s platform is so compelling over traditional SSD solutions like those offered by competitors. from Pure Storage like Dell and NetApp. .
Pure Storage isn’t a market leader in terms of share, but they’re well on their way to becoming the leader if they can continue to grow at the rate they’ve been. It’s the only company in the table above that offers investors a pure play on SSD data storage, unless Western Digital decides to expand its SSD offering.
Conclusion
There’s a lot to like about Pure Storage, but we also have to consider the opportunity costs. Is there another data company we would rather invest in instead? Maybe. As we look for a way to increase our exposure to big data growth, we are also looking at another company whose simple valuation ratio is now within an acceptable range. Can anyone guess which company this is?
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