On Wednesday, Citi maintained its Buy rating on Pure Storage (NYSE: NYSE:PSTG) and increased its price target to $75 from the previous $63. The adjustment came after the company's shares saw an over 20% surge following a report of results that exceeded expectations. Additionally, Pure Storage announced a significant design win with a top-4 hyperscaler.
The company modestly raised its FY25 guidance, despite management's indication of a slower trajectory for subscription revenue. The annual recurring revenue (ARR) grew by 21.5% year-over-year, and the remaining performance obligations (RPO) for subscription revenue increased by 17% year-over-year. However, it was noted that while smaller deals continue to close with strong momentum, larger deals are taking more time to finalize.
Management also provided insights into the decline in product gross margins, attributing it to a strategic shift towards solutions that are more optimized for cost and capacity. Despite this, the company's high-level guidance hinted at significant revenue potential from the hyperscaler opportunity win, which could generate as much as $450 million by FY27 (CY26). This win is expected to contribute high margins due to the licensing nature of the agreements.
Citi's analyst pointed out that while the estimate revisions for FY26 (CY25) are minor, FY27 (CY26) forecasts see an increase, with the possibility of further upside. The price target has been raised based on an unchanged multiple of approximately 30 times the CY26 earnings per share (EPS). The firm's confidence in Pure Storage is reflected in the maintained Buy rating and the new, higher price target.
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