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What Pure Storage IPO could mean for 'unicorns'

Pure Storage CEO Scott Dietzen and co-founders John Hayes and John "Coz" Colgrove.
Source: Pure Storage
Pure Storage CEO Scott Dietzen and co-founders John Hayes and John "Coz" Colgrove.

Data company Pure Storage is expected to go public Wednesday amid lingering skepticism about the IPO market for tech enterprises, and investors will be watching closely.

"There's going to be a lot of attention put on Pure Storage. If it does well, it could bode well for other tech IPOs, like Square, which is expected to go public later this year," Renaissance Capital principal Kathleen Smith told CNBC.com.

Smith added that a positive IPO from Pure could also pave the way for more "unicorns" — privately held companies with a value of at least $1 billion — to go public.


Pure placed its value at over $3 billion, and in its S-1 filing in August, it said it expects to raise $300 million from its IPO. Shares are expected to price at $16 to $18.

"The sense is that the deal is going well. My guess is that it will price in the middle or at the top of the range," Carter Mack, president at JMP Group, told CNBC.

The company has been growing at an exponential rate, with its revenues rising 603 percent and 308 percent in its last two fiscal years. Smith also noted that Pure's product sales in its most-recent quarter rose about 144 percent.

Nevertheless, a negative Pure IPO could spell trouble for high-flying start-ups, as it could limit their access to capital, Smith noted.


Key challenges ahead

Pure's revenue may be growing by triple digits, but it faces at least one challenge: earnings.

"We have not achieved profitability for any fiscal year since our inception," Pure said in its prospectus, adding that it has an accumulated deficit of $390.7 million as of April 30.

"We anticipate that our operating costs and expenses will increase substantially for the foreseeable future," the company said. "Our strategy is to increase our investments in marketing, sales, support and research and development at the expense of near-term profitability."

"No one is going to judge this company on earnings any time soon; it's going to be on revenue," said Alex Kurtz, an analyst at Sterne Agee CRT. But Kurtz said the company eventually will have to justify its lack of profitability to investors.


Another challenge for Pure is the recent downturn in tech IPOs, Smith said. "The last time we saw a tech IPO was July 16; almost three months ago," she said, referring to cybersecurity firm Rapid7.

Rapid7 was the only tech company to go public in the last quarter, making it the least-active quarter for tech since first quarter 2009, Renaissance Capital said in a Sept. 30 note.

Smith said Pure's trading peer Nimble Storage also "hasn't traded well."

Nimble went public in December 2013 and its stock has dropped 57.6 percent since hitting an all-time closing high of $56.23, according to FactSet.