Shares of enterprise data storage company Pure Storage entered trading Tuesday ahead more than 80% on the year — driving a valuation one analyst says isn't justified. Pure Storage stock fell Tuesday after UBS analysts downgraded their view of the company to a sell rating, from a previous neutral.
"We rate Pure shares sell, as share loss in Pure's core all-flash market along with increased competition from well-capitalized private competitors should pressure growth," a team of UBS analysts led David Vogt wrote to clients Tuesday.
On the stock market today, Pure Storage stock lost more than 4% to close at 62.79.
Is AI Getting Too Much Credit?
Mountain View, Calif.-based Pure Storage offers high-speed data storage systems for businesses using all-flash chip technology. Improving sales growth and earnings have helped the stock this year, along with the view that Pure Storage will benefit from the increased data needs driven by generative artificial intelligence.
But Vogt offered a more bearish take, saying there is "too much credit given to AI" for Pure Storage stock.
"Pure's valuation has benefited from the view that AI infrastructure investments will accelerate growth," Vogt wrote. "However, AI related storage spending will likely be slower than the market expects and more tied to inference, a slower growth market than training."
Inference generally refers to the output of AI models. Training is the more compute-intensive process of feeding data to power those models.
Meanwhile, Vogt says Pure Storage is facing increased competition for the flash storage market from private vendors as well as flash products from NetApp and Hewlett Packard Enterprise.
UBS estimates Pure Storage sales will grow about 8% annually over the next five years, compared to 16% compound annual growth in the prior five.
Despite the downgrade, UBS upped its price target for Pure Storage's stock to 47 from 44. Still, that represents a 28% decline from where Pure Storage stock closed on Monday.
Pure Storage Stock Analyst Day
UBS is the most bearish on Pure Storage stock among stock analysts, according to ratings tracked by FactSet. Otherwise, Pure Storage stock has five neutral ratings and 16 buy or equivalent calls.
Pure Storage recently hosted a customer event and analyst day. Commentary from Pure Storage stock analysts was largely positive following the June 20 event in Las Vegas. While the company did not provide updated financial targets, Pure Storage detailed a series of product upgrades. Its goal is to build a broader hardware and software platform for storing data, powered by its flash-storage hardware.
Pure Storage also teased a hyperscaler data center design win to be announced later this year. Hyperscalers are the tech giants that require computing power on a massive scale, such as Amazon and Microsoft.
"We believe it is Pure's software prowess that underpins its potential to become a key storage supplier to hyperscalers and preferred architecture for AI workloads, both opportunities that we have said are likely in the billions," Guggenheim analyst Howard Ma wrote to clients following the analyst day. Guggenheim rates Pure Storage as a buy.
Pure Storage stock has gained nearly 80% from the start of the year. Shares broke out of a double-bottom base at a buy point of 55.09 in mid-May, according to IBD MarketSurge charts. The stock hit an all-time high of 70.41 on June 18. But with Tuesday's drop, Pure Storage shares fell below their 21-day moving average.
Meanwhile, PSTG stock is part of the IBD 50, Tech Leaders. and Big Cap 20 stock lists.
