Comment Pure Storage shares went on sale at about $17 today, valuing the all-flash array startup at roughly $3bn.
Would they rise or fall after debuting on the stock market? Clue: they fell, from $16.74 to $16.29.
If the shares had sold at $17, Pure would have raised $425m. This is an eagerly awaited IPO, as it tests the willingness of investors to back all-flash array startups like SolidFire and Kaminario, with a knock-on effect for hybrid array startups such as Tegile and Tintri.
A successful Pure IPO will also boost the confidence of hyper-converged vendors such as Nutanix and Simplivity, and might even extend to object storage startup Scality.
Pure's post-IPO growth chances
Pure is not profitable and it is growing strongly but not exhibiting hyper-growth.
For example, its latest quarter, the first fiscal 2016 quarter, saw revenues of $74.1 million, which was 200 per cent higher than the $24.7 million reported a year ago.
Pure Storage quarterly revenue and net income history
But the quarter-on-quarter growth rate has slowed dramatically:
What could have caused this slowing growth rate?
The company introduced a refresh of its product range in June, featuring larger capacities, faster performance, and a non-disruptive upgrade. There's nothing there, you would think, that would slow sales.
It did reveal, in its IPO documents, that Gartner figures about its market position, which it had used in its marketing, overstated its position quite substantially, and that might have had an effect, lowering its general credibility.
However, the pace of all-flash array (AFA) product introduction from its competitors has strengthened.
HP introduced a new all-flash array, the StoreServ 20000, in June.
NetApp has boosted its all-flash FAS offerings with the AFF8000. Tintri came out with an AFA in August. Oracle introduced an all-flash FS1 in September. Tegile announced a 2-tier all flash array also that month. Nexenta joined forces with SanDisk to get in the AFA act.
That's five new AFAs in five months, the general period in which Pure's growth rate slowed.
We are confident that Nimble Storage will bring out an AFA in early 2016. Let's just list some of Pure's enterprise AFA competition; Dell, EMC, HDS, HP, IBM, Kaminario, Nexenta, NetApp, Solidfire, Tegile, Tintri, Violin Memory, and X-IO – unlucky thirteen?
What has Pure Storage got with its AFA that the other vendors haven't got? Arguably it has a better upgrade/support business model but that is all. Generally features are roughly equivalent and price/performance a moving discount-negotiated feast. No existing vendor wants Pure in its accounts, meaning they will discount like hell, and Pure doesn't seem to have a strong vertical market niche or technology advantage of a stand-out kind.
We can easily posit high, mid, and low growth rates for Pure:
Pure post-IPO growth rate possibilities
This is simple back-of-an-envelope thinking. Certainly the individual lines could move up or down, but you get the general idea. The question we ask is, why should Pure get back to 40 per cent QOQ growth when it has no stand-out general technology advantage, no strong vertical market feature set, and intensifying competition from mainstream and other startup vendors with roughly equivalent products?
Our thinking is that Pure will have a difficult time moving to profitability when there seems little justification for increasing its average selling price in the circumstances described. It will likely continue to burn cash, make losses and unless it develops a compelling and sustainable technology and/or business model advantage, then it will gradually cease being a star and settle into being a second tier AFA vendor, hopefully not worse, meaning the stock price will fall. ®