Pure Storage Stock Slid 27% on Earnings. Why Analysts Say It’s No Big Deal.

Pure Storage is looking to grow its business selling data storage hardware to hyperscalers.

Key Points

• Pure Storage’s stock dropped 27% despite meeting earnings expectations and exceeding revenue forecasts by 16% year-over-year.
• The company plans to reinvest AI hyperscaler revenue into research and development, and sales and marketing, potentially impacting 2027 profit margins.
• Analysts expressed concern over the company’s unquantified fiscal 2027 hyperscaler sales expectations and the unclear path to scaling its 2 exabyte footprint.

It isn’t often that a stock drops 27% and analysts think it’s no big deal. Then again, Wall Street doesn’t don’t often see shares drop that much when a company meets earnings expectations.

But that’s what happened to Pure Storage , which reported third-quarter earnings after Tuesday’s close.

The data storage company posted adjusted earnings of 58 cents a share for the quarter, in line with analysts’ estimates. Revenue totaled $964.5 million, up 16% from the year before and surpassing Wall Street’s call for $955.9 million.

Still, the stock plummeted 27.3% to close at $68.85 on Wednesday, and was up 0.3% to $69.04 at 9:21 a.m. on Thursday.

Guidance wasn’t the problem. The company boosted its fiscal-year outlook for adjusted operating income to $634 million at the midpoint, up from $615 million.

So what gives?

Pure Storage announced plans to reinvest part of its revenue from sales to artificial-intelligence hyperscalers into research and development as well as sales and marketing. These investments could weigh on profit margins in fiscal 2027.

Also, while the company’s revenue beat was nice, it was narrower than its outperformance in the second quarter, analysts at Guggenheim Securities noted.

“For a stock that has significantly outperformed the market (we believe justifiably so), Pure likely needs to have pristine prints to continue that momentum,” wrote Guggenheim’s Howard Ma and Joseph DiBartolomeo.

The firm reiterated a Buy rating and an $85 price target, arguing the company’s core business is still improving.

Another factor that could have weighed on the stock: investor concern about the company’s unwillingness to quantify its expectations for fiscal 2027 hyperscaler sales.

Shareholders will get more color on the fourth-quarter earnings call about the hyperscaler business, which counts Meta Platforms as a customer, Pure Storage said.

“We expect investors will wait for additional details before stepping in,” Citi analyst Asiya Merchant wrote in a research note.

Citi reiterated a Buy rating and trimmed its price target to $105 from $110, based on slightly higher estimated operating expenses.

Analysts at Susquehanna opted to move to the sidelines because of the uncertainty. The market for embedded solid-state drives—a flash memory product used by data centers—is 460 exabytes, the firm said, and Pure Storage has claimed just 2 exabytes so far.

“The path to scaling this 2EB footprint and associated software revenues remains unclear,” wrote analyst Mehdi Hosseini.

Susquehanna downgraded the stock to Neutral from Positive but maintained its price target of $100. It’s waiting for greater insight into the company’s hyperscaler business.

Write to Nate Wolf at nate.wolf@barrons.com