Pure Storage Inc. (PSTG) has been the leader in Hybrid Flash for years. It has been an upstart and a true disruptor, growing consistently for a decade:
Pure Storage attained the Holy Grail last night, securing a transformational deal with a Top 4 Hyperscaler to replace disk drives in the data center two years out:
This is HUGE. This is the first step to Pure Storage becoming THE next-gen storage device in data centers. Think about that.
Western Digital Corp. (WDC) and Seagate Technology Holdings (STX) do $30B a year in revenues, collectively. Two-thirds of that $30B is from hyperscalers.
IF disk drives are out, and Pure Storage's solution is set to become THE next-gen storage play, this deal will have reverberations for years to come.
While STX and WDC will not become obsolete overnight in the data center, make no mistake, both companies must be quivering. Think of this as their Intel moment, relative to how NVIDIA won the data center from them in the past few years.
By switching to PSTG’s solution, this large hyperscaler will save 20% power versus traditional disk drives. This is game changing, as it should translate into accelerated adoption of Pure Storage over disk drives from 2026 to 2030.
POWER. POWER. POWER. Is the biggest need. Wherever the hyperscalers can save on massive power is where the puck is going. Here is how the CEO explained it:
We view PSTG’s win as transformational and very similar to Bloom Energy Corp (BE)'s first big data center win. While the market is still in VERY EARLY stages of adoption, it is also clear where the puck is going overall: toward PSTG becoming the "Long Term Standard of Care" for storage, if you will.
The ramp will begin in Calendar Year 2026. Double-digit exabytes COULD translate to $500M of revenues as early as 2026. It should build from there. My best guess is to $1-$2B+ by 2028, from just this first customer.
Like Bloom Energy, Pure is in discussions with other large hyperscalers as well. We believe the odds are very high they land the others, in due time. But that's the risk – that PSTG only secures this one. As an aside, we think PSTG landed Meta Platforms Inc (META), as they have been working with META for the past two years.
So while we think they get the others across finish line, until they do, the bears will focus on “only one Hyperscaler” adopting. It goes without saying we do not care what the bears think at this point.
Let's take a look at out-year numbers:
We think it is safe to say PSTG will now do $4.4B in Fiscal 2027 and make $2.50 a share.
We expect $6B-$7B in FY 2028 and the company to earn $4-$5.
So, earnings are, very likely, poised to DOUBLE the next three years.
IF earnings double the next three years, the stock price is poised to inflect and double, and, even more likely, more than double, as the valuation re-rates.
All of this will happen WELL AHEAD OF THE ACTUAL RAMP. Think BE going from $20-$28 after its AEP deal.
Valuations will go cra cra if they land another 1-2 hyperscalers next year. Usually once the first one drops, the others will follow. We think this takes shape here.
Our Long-Term Conviction on owning PSTG is a resounding 10.
Near-term, we have an 8 conviction. We think PSTG needs some time to break out.
The stock has a big gap down to work through and a ton of resistance from the last nine months. But in this tape, and with this type of transformational deal, time may be measured in hours, as opposed to days and weeks.
Therefore, we will be watching PSTG's volume closely. The quicker it does 10-15M the more likely the stock will break out to new highs sooner than we anticipate.
We plan to be bidding in the low-$60s and plan to work into PSTG this morning. We will have a full position by the early afternoon, or sooner, on any push to new highs.
Stop Loss: A Time Stop is in place here for the next six months.
This deal is too disruptive to not sit with PSTG a long-term investment. We attach 70% odds at least one other hyperscaler deal is announced in the coming quarters. This would immediately get the stock to $150, as we would then be looking at $8-$10B in revenues and $6+ in earnings 3 years out.
Sometimes best to keep simple and that is what we plan to do here, buy PSTG today and ride most of the position to $100. Thereafter, we plan to keep a third of our position on for a long-term move, potentially one that could become a multi-bagger (from this morning's levels) in the coming years, should other hyperscalers adopt PSTG’s solution as well.
Of course, as many of you know, we are prone to selling too early and we plan to take some risk off on the way up.
You do your process, we will do ours.
The big risk to the thesis is our numbers could be off as it will take time to see how Pure Storage’s licensing model truly plays out. Keep in mind, that while our math on the revenue bump could be off, PSTG’s licensing model is high-margin and highly accretive.
Another risk is near-term demand could come in fits and starts as Management cited orders being pent up due to a muted IT market. So something to be mindful of.
If our long-term thesis proves correct and traditional disk drives will be phased out in favor of solutions like Pure Storage, then WDC and STX are long-term shorts. We plan to stay alert for proper entry points on the short-side.
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Disclosure: We are long PSTG stock and calls. We may change our positioning at a moment’s notice, without notifying you of any such moves.
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