Why Pure Storage Stock Took a Dirty Dive Today

Shares of Pure Storage (NYSE: PSTG) crashed hard on Wednesday morning. At 11:30 a.m. ET, the stock was down 26% from Tuesday's closing price. The culprit? A strong earnings report with a side of fairly modest next-quarter guidance.

The earnings report was not overwhelmingly good

There wasn't much wrong with Pure Storage's Q3 2026 report -- just enough for the bears to hang their hat on. For a growth stock trading at lofty valuations, that can be enough to inspire a sudden price drop.

The enterprise-class data storage expert saw Q3 revenues rise 16% year over year to $964.5 million. Adjusted earnings per diluted share rose from $0.50 to $0.58. Both revenues and operating income exceeded the top end of management's guidance range for this period. The bottom-line result was in line with analyst projections, and the average Wall Street firm would have settled for top-line sales near $955.0 million.

Looking ahead, Pure Storage boosted its full-year projections for every metric, indicating a strong fourth-quarter outlook.

However, it wasn't a perfect picture. Recurring sales grew slightly slower than total revenues, which is a negative trend for long-term growth visibility and pricing power. Analyst reactions included downgrades, lower price targets with "buy" ratings, and raised targets paired with an unchanged "sell" rating. Investors saw an unclear mess and erased the gains Pure Storage posted after a more obviously bullish report three months ago.

Image source: Getty Images.

Even AI partnerships couldn't justify that price tag

Of course, Wall Street expected a stronger long-term overview this time. The stock soared to an all-time high of $100.59 per share a month ago, driven by the late-October unveiling of a high-powered storage stack for artificial intelligence (AI) data centers. This product features an Nvidia (NASDAQ: NVDA) AI accelerator, high-speed networking by Cisco Systems (NASDAQ: CSCO), and Pure Storage's data management software. So the stock was trading at an eye-popping 233 times trailing earnings yesterday, reflecting sky-high growth expectations.

But the report wasn't good enough to support that optimistic outlook, so Pure Storage's stock is cooling down today. If you were waiting for a more reasonable price before investing in this nuts-and-bolts AI data center supplier, this could be it. Even then, you're betting on incredible business growth. I guess it could work out, given the muscular partners Pure Storage is working with, but I'm not a buyer of this richly valued stock today.

Anders Bylund has positions in Nvidia. The Motley Fool has positions in and recommends Cisco Systems, Nvidia, and Pure Storage. The Motley Fool has a disclosure policy.