Why Pure Storage Stock Popped on Thursday
Shares of data storage software and hardware company Pure Storage (NYSE: PSTG) got a nice 4% bump (as of 1:40 p.m. ET) on Thursday, after investment bank KeyBanc raised its price target on the shares by 7.5%, to $43 a share.
The banker maintained its overweight rating on the stock, as The Fly confirmed today.
Don't get too excited
Now, don't get too excited about this news. KeyBanc made it clear in its note that it was raising Pure Storage's valuation mostly because the market is valuing software-as-a-service (SaaS) companies in general more highly today -- not because of anything Pure Storage itself has done.
It's also not 100% clear precisely what other SaaS stocks KeyBanc was using as its comparables when deciding that Pure Storage should be worth more because other companies cost more. According to data from S&P Global Market Intelligence, Pure Storage doesn't actually think it has any direct competitors in its business, while looking in the other direction, only a couple of companies (neither of which you've never heard of before) name Pure Storage as their direct competitor.
And granted, that could actually be a plus for Pure Storage stock -- fewer competitors is generally a good thing. But it does raise some doubts about KeyBanc's rationale for upgrading the stock.
Is Pure Storage stock a buy?
After all, from a valuation perspective, Pure Storage really doesn't look like much of a bargain. The company boasts a strong balance sheet and positive profits, but Pure Storage shares still sell for a pricey 167 times trailing earnings right now. This seems expensive given that most analysts don't expect the company to grow earnings much faster than 12% annually over the next five years.
On the plus side, Pure Storage stock looks a lot more reasonably priced when valued on free cash flow. Its price-to-FCF ratio is much more palatable at less than 26x. Still, that leaves the stock trading for a price-to-FCF-growth ratio of about 2. That's at the upper limits of what most value investors would consider a fair price, and far more than the ratio of 1 that I look for in a growth-at-a-reasonable-price stock.
Unless and until Pure Storage stock gets a lot cheaper, or a lot more profitable, I'll be passing on this KeyBanc buy recommendation.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
