On Wednesday, Morgan Stanley adjusted its stance on shares of Pure Storage (NYSE:PSTG), moving from an Overweight to an Equalweight rating. The firm also set a price target of $60.00 for the stock. The decision follows Pure Storage's significant year-to-date performance, which saw the company's stock price increase by approximately 90%, compared to the NASDAQ's gain of around 17%.
According to Morgan Stanley, the growth in Pure Storage's stock value has been driven by excitement over potential large-scale deals with hyperscalers and advancements in artificial intelligence (AI). However, the analyst believes that the current valuation, which stands at roughly 36 times the fiscal year 2026 estimated free cash flow (FCF), already reflects these opportunities. This valuation is higher than the average for software companies, which is around 27 times the calendar year 2025 estimated FCF.
The firm's Global Insight report, also issued on Wednesday, suggests that Pure Storage's stock appears more expensive when evaluated on a cost of equity (COE) basis compared to its AI industry peers. While acknowledging the possibility of a substantial cloud contract and the company's total cost of ownership (TCO) and power advantages, Morgan Stanley points out that the majority of revenue from cloud deals and AI is expected in the more distant future. Consequently, near-term estimate revisions could be more restrained.
Morgan Stanley does recognize that a formal announcement of a deal with a hyperscaler could provide some additional lift to Pure Storage's stock. Nevertheless, the firm's assessment is that most of the potential from such a deal has already been factored into the current stock price.
In other recent news, Pure Storage has reported a significant 18% year-over-year revenue increase in the first quarter of the fiscal year 2025, reaching $693 million. This growth was primarily attributed to high demand for the company's FlashBlade solutions and sales to both new and existing enterprise customers. The operating profit for the quarter was a record high at $100 million. Pure Storage also revealed its focus on the AI market and anticipates continued growth in its storage-as-a-service offerings, targeting $600 million in total contract value sales.
In addition to its strong financial performance, Pure Storage announced a strategic investment in LandingAI, a leader in visual AI technology. This partnership aims to enhance the capabilities of vision AI within the enterprises Pure Storage serves. The collaboration with LandingAI is expected to transform the way visual data is utilized in AI applications, with a specific focus on LandingAI's Large Vision Model solutions.
InvestingPro Insights
In light of Morgan Stanley's assessment of Pure Storage (NYSE:PSTG), real-time data from InvestingPro provides additional context for investors. With a market capitalization of $21.64 billion, Pure Storage's stock is trading at a high P/E ratio of 223.33, which reflects expectations of future earnings growth. This is supported by an adjusted P/E ratio for the last twelve months as of Q1 2025 at 166.01, indicating a premium valuation compared to historical earnings.
InvestingPro Tips highlight that Pure Storage holds more cash than debt, suggesting a strong balance sheet, and net income is expected to grow this year. Additionally, 15 analysts have revised their earnings upwards for the upcoming period, which may indicate potential optimism about the company's financial future. However, with an RSI suggesting the stock is in overbought territory, investors should be cautious about short-term price volatility.
For those seeking more in-depth analysis, there are over 15 additional InvestingPro Tips available at https://www.investing.com/pro/PSTG. To delve deeper into Pure Storage's financials and unlock the full range of insights, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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