Seven storage vendors downgraded as AI clouds growth forecasts

Seven storage software companies have had their prospects surprisingly downrated due to the onrush of AI influencing customer buying decisions.

William Blair analyst Jason Ader wrote in a recent note, "AI has materially reduced confidence in long-term forecasts" and the ratings framework is changing "to identify core attributes of likely success over the next 12 months and compare each company against its peer group." The previous valuation metrics included long-term sales and cash flow forecasts, which are now less reliable and relevant.

He cites four new key success criteria: ability to execute, AI defensibility, pricing model, and likelihood of organic acceleration. Ader has rerated 17 software suppliers, which includes the 12 we are interested in. The rerating involves "the relative positioning of each company vs its peer group over the 12 months." Each company is scored from 1 to 5 on each of the success criteria. "Cumulative scores between 16 and 20 are assigned Outperform ratings, scores between 11 and 15 are assigned Market Perform ratings, and cumulative scores less than or equal to 10 are assigned Underperform ratings." The pricing model prefers consumption-based to seat-based pricing. 

Here are his ratings for the storage suppliers:

Some of his comments:

Backblaze: Management's ability to execute is our top concern given the company's uneven track record and the fact that Backblaze is still struggling to earn a profit at its current scale. In addition, as a pure play in cloud storage, Backblaze risks being disintermediated or made less relevant by multi-product competitors.

Box: Box's score reflects a credible strategic opportunity in AI-enabled content workflows.

Commvault: Commvault's execution deserves high marks over the past five years – especially in view of the new management team's successful turnaround and growth revival. That said, financial performance over the past couple of quarters has not met expectations and murky communications have left investors guessing (plus we are still waiting for a new CFO).

Dropbox: The low score reflects structural growth issues alongside ongoing execution issues.

Everpure: Everpure is tied for the highest score in our coverage universe, reflecting best-in-class execution, a solid competitive moat, a pricing model that is structurally aligned to capture AI-driven infrastructure demand, and a high likelihood of organic revenue acceleration.

MongoDB: Its score reflects steady execution, a durable developer-centric moat, and its consumption/capacity-based pricing model.

N-able: Its score reflects an uneven track record, a largely seat-based pricing model, and questionable prospects for organic revenue growth acceleration.

NetApp: Its score reflects its capacity-based pricing model and a reasonable likelihood that AI is a tailwind to its core business, offset by an uneven execution track record and ongoing competitive pressures in the storage market. On execution, NetApp continues to operate well across its enterprise installed base but lacks the same momentum or share-gain narrative as higher-scoring peers (notably Everpure).

Nutanix: The score reflects a sticky product with high switching costs and a structurally favorable pricing model, balanced against uneven recent execution and muted near-term growth prospects.

Rubrik: Its score reflects best-in-class execution, a capacity-based pricing model, and the likelihood that AI will be a tailwind.

Snowflake: The score is due to a strong track record on execution, a powerful ecosystem and competitive moat (tied to data gravity) and a consumption-based pricing model.

Varonis: This reflects a company with thematic relevance in the AI era, offset by recent execution choppiness, near-term growth headwinds associated with its SaaS model transition, and an intensifying competitive landscape.

Comment

This is only a partial view of certain suppliers in the storage software industry, and excludes suppliers such as Dell and HPE. The financial analyst is also looking only at publicly traded companies and so, in this exercise, is not looking at startups and privately owned suppliers such as Databricks, Cohesity, VAST Data, Veeam, Wasabi, etc. Even so, the insights into the business state and prospects of the reviewed suppliers are revealing in that seven previously highly rated businesses face bleaker prospects due to AI-driven market disruption.