Pure Storage Stock Shows Every Sign Of Being Modestly Overvalued - GuruFocus.com

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Pure Storage Stock Shows Every Sign Of Being Modestly Overvalued - GuruFocus.com Pure Storage Stock Shows Every Sign Of Being Modestly Overvalued - GuruFocus.com

The stock of Pure Storage (NYSE:PSTG, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $21.98 per share and the market cap of $6.2 billion, Pure Storage stock is estimated to be modestly overvalued. GF Value for Pure Storage is shown in the chart below.

Pure Storage GF Value Chart

Because Pure Storage is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 9.1% over the past three years and is estimated to grow 12.31% annually over the next three to five years.

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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Pure Storage has a cash-to-debt ratio of 1.38, which is in the middle range of the companies in Hardware industry. GuruFocus ranks the overall financial strength of Pure Storage at 4 out of 10, which indicates that the financial strength of Pure Storage is poor. This is the debt and cash of Pure Storage over the past years:

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Pure Storage has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $1.7 billion and loss of $1.06 a share. Its operating margin of -13.66% worse than 86% of the companies in Hardware industry. Overall, GuruFocus ranks Pure Storage's profitability as poor. This is the revenue and net income of Pure Storage over the past years:

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Pure Storage is 9.1%, which ranks better than 72% of the companies in Hardware industry. The 3-year average EBITDA growth is -12.3%, which ranks worse than 79% of the companies in Hardware industry.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Pure Storage's return on invested capital is -20.33, and its cost of capital is 9.76. The historical ROIC vs WACC comparison of Pure Storage is shown below:

To conclude, The stock of Pure Storage (NYSE:PSTG, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 79% of the companies in Hardware industry. To learn more about Pure Storage stock, you can check out its 30-year Financials here.

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