To start with, I will say that the following includes many, many assumptions. I’ve uploaded my spreadsheet at the following link, so that whoever might be interested could take a closer look at the formulas and see if I have made any errors worthy of pointing out. Much of the information associated with this “analysis”/projection is from the latest Pure Storage earnings presentation (https://s21.q4cdn.com/687136699/files/doc_financials/present…). Please do not use this analysis on its own for any investment decision relating to PSTG.
If this seems to be worthwhile methodology, this type of analysis may become my version of a Tom Engle “Page Post” (TMF1000 - http://my.fool.com/profile/TMF1000/activity.aspx ).I will say that I do find the good case that I developed to be more likely than the base case (which probably has revenue growth rates dropping too quickly), and considerably more likely than the bad case. If year-over-year revenue growth for 2018 (FY19) is somehow only 25%, I will not be staying invested in Pure Storage and would hopefully sell out prior to the announcement next March of those full-year results.
Link to spreadsheet file:
https://drive.google.com/file/d/15c_ZsZeI0FQKlJhFkzs-1JlIJjq…
2017 (Act.) 2018 (project.) 2019 2020 2021 **2022 2023**
**Base Case** FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
Revenue (millions) $440.40 $728.00 $1,023.00 $1,335.00 $1,668.75 $2,002.50 $2,302.88 $2,533.16 $2,659.82
Rev. Growth Rate - 65.3% 40.5% 30.5% 25.0% 20.0% 15.0% 10.0% 5.0%
Op. Margin - - 8.0% 10.0% 12.5% 15.0% 17.5% 20.0% 22.5%
FCF % - - 0.75% 2.3% 4.1% 6.0% 7.9% 9.8% 11.6%
FCF - - $7.70 $30.07 $68.88 $120.20 $181.41 $247.05 $309.28
Net Cash - - $597 $619.56 $671.22 $761.37 $897.43 $1,082.72 $1,314.67
**Share Price** - - $21.38 $23.50 $28.00 $30.00 $33.00 **$34.00 $31.00**
Share Count (mil's) - - 218 264 276 289 301 314 326
Market Cap (mil's) - - $4,660.8 $6,192.3 $7,728.0 $8,655.0 $9,933.0 $10,659.0 $10,106.0
Enterprise Value - - $4,063.8 $5,572.7 $7,056.8 $7,893.6 $9,035.6 $9,576.3 $8,791.3
EV/FCF - - 527.8 185.3 102.4 65.7 49.8 **38.8 28.4**
Y-o-Y FCF Growth - - - 290.6% 129.0% 74.5% 50.9% **36.2% 25.2%**
**Bad Case**
Revenue (millions) $440.40 $728.00 $1,023.00 $1,278.75 $1,508.93 $1,690.00 $1,791.40 $1,845.14 $1,845.14
Rev. Growth Rate - - - 25.0% 18.0% 12.0% 6.0% 3.0% 0.0%
Op. Margin - - 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%
FCF % - - 0.75% 1.3% 1.8% 2.3% 2.8% 3.3% 3.8%
FCF - - $7.70 $16.02 $26.45 $38.07 $49.31 $60.02 $69.24
Net Cash - - $597 $605.01 $618.23 $637.27 $661.92 $691.93 $726.55
**Share Price** - - $21.38 $22.00 $22.00 $21.00 $18.00 __*$12.00 $8.00*__
Share Count (mil's) - - 218 266 281 296 311 326 341
Market Cap (mil's) - - $4,660.8 $5,852.0 $6,182.0 $6,216.0 $5,598.0 $3,912.0 $2,728.0
Enterprise Value - - $4,063.8 $5,247.0 $5,563.8 $5,578.7 $4,936.1 $3,220.1 $2,001.4
EV/FCF - - 527.8 327.6 210.4 146.5 100.1 **53.7 28.9**
Y-o-Y FCF Growth - - - 108.0% 65.1% 44.0% 29.5% **21.7% 15.4%**
**Good Case**
Revenue (millions) $440.40 $728.00 $1,023.00 $1,381.05 $1,795.37 $2,262.16 $2,782.46 $3,338.95 $3,906.57
Rev. Growth Rate - - - 35.0% 30% 26% 23% 20% 17%
Op. Margin - - 8.0% 11.0% 14.0% 17.0% 18.0% 19.0% 20.0%
FCF % - - 0.75% 3.8% 6.8% 9.8% 10.8% 11.8% 12.8%
FCF - - $7.70 $51.83 $121.24 $220.62 $299.19 $392.42 $498.19
Net Cash - - $597 $648.83 $770.06 $990.68 $1,289.87 $1,682.29 $2,180.48
**Share Price** - - $21.38 $25.00 $30.00 $36.00 $40.00 **$47.00 $50.00**
Share Count (mil's) - - 218 263 274 284 294 304 314
Market Cap (mil's) - - $4,660.8 $6,575.0 $8,220.0 $10,224.0 $11,760.0 $14,288.0 $15,700.0
Enterprise Value - - $4,063.8 $5,926.2 $7,449.9 $9,233.3 $10,470.1 $12,605.7 $13,519.5
EV/FCF - - 527.8 114.3 61.5 41.9 35.0 **32.1 27.1**
Y-o-Y FCF Growth - - - 573.1% 133.9% 82.0% 35.6% **31.2% 27.0%**
Apologies for not being able to get this table to look better, but I will not be spending any longer formatting it here. It should show up well in the Google Doc. I have bolded the years 2022 and 2023 and the associated share prices EV/FCF ratios, and the Y-over-Y FCF growth.
To summarize my methodology (which is certainly up for critique/refinement), I have listed the actual revenue numbers from the past few years. For 2018 (FY19), the base case includes the midpoint of the revenue guidance provided by Pure Storage management. The good case includes a revenue growth rate a bit above guidance, with the revenue growth rate slowing but not slowing as quickly as the base and bad cases. For the operating margin, I used the target model provided by Pure management as a guide, with good case reaching it faster and the bad case not quite reaching it during the “analyzed” period. For the base case, I assumed that 3/4 of the increase in operating margin would flow down to FCF (bad case, only half…good case, the full amount). For the base case, I assumed that 3/4 of the FCF would be added to the net cash position (bad case, only half…good case, all of the FCF added to net cash position). For share counts, I use the 218 million at present, with 251 as the starting point for future years (as that’s what it would be with GAAP profits). I looked at last year’s report and the share count increased by 13.6 million from 1/31/16 to 1/31/17, so I used that in guesstimating future share counts (using more dilution for the bad case, less for the good). I then adjusted the assumed share prices to get the 2022 and 2023 values to provide an EV/FCF ratio that was numerically about the same as the year-over-year FCF growth rate (similar to the 1YPEG). I didn’t drop the share price fully in the bad case to get a good match.
Tons of assumptions, each of which could be debated.
Bottom line, revenue growth rates need to stay high, share counts need to not be overly diluted, and Pure needs to continue boosting their operating margin and FCF margin. Otherwise, Pure Storage shares won’t appreciate a ton. That is a whole lot of John Madden-worthy observations, I know, but still maybe provides some value of ranges of what it would take to justify various future share price possibilities for PSTG shares.
volfan84
caveat emptor…and note that this is my first post of this type and includes ongoing methodology development
Before hitting post, I can’t help myself and will do a “best case” projection, with growth rates staying higher longer (that will not be included in the linked Google doc). For that scenario, changing the growth rate from 40% for the present year, tapering down to 20% revenue growth for 2023…same margins as “good” case…I get a $70/share price for the end of 2023 to get an EV/FCF value of 29.5 (against a 30.2% FCF growth rate…just under $5.2B of revenue). Who knows what in the world will actually happen.