Market-wide Price Anchoring (NTNX)

This is the same post I made within the NTNX deep dive thread, but this top may deserve its own thread.

After reading through Saul’s monthly write-up and looking at the price action of Nutanix recently, I get the impression that Nutanix’s latest quarter actually warrants a share price in the $60-ish range, maybe even $65-ish, but that the market in general is engaging in price anchoring. It seems that the market is disbelieving that the move up from around $20-ish/share in the fall to $60-ish/share now is actually warranted by the growth numbers.

Anyone have any further thoughts about the market possibly price anchoring with NTNX (obviously the recent declines due to trade war fears have also factored into matters, but that is not the topic here)?

For the sake of a quick reference, I will paste Saul’s summary here (with my emphasis added in bold):

Nutanix was a new position last September. I entered at about $21.70 with a fairly good sized position. It closed Friday at 51.57, so it’s up 140% in nine months. Sure, stock picking doesn’t work. We’ll all return to the mean some day. Statistics prove it! Hah!

Nutanix’s area is “hyper-converged infrastructure” in data storage. I don’t have a clue what that means, but Gartner rated Nutanix first on completeness of vision, and first on the ability to execute. It is doing away with the pass-through zero-margin hardware that it was selling, and pivoting to be a pure software company (also moving towards a SaaS model). This makes their revenue growth look deceptively slow because the hardware sales are no longer being counted, and because of subscription revenue being counted only month by month, even if all paid in advance. (Pretty odd to talk about revenue growth of 41% looking deceptively slow, isn’t it?). Nutanix apparently just won a $45 million contract with the Air Force, its biggest contract ever.

Nutanix has a Net Promoter Score of 90 !!! (For those who aren’t familiar with it, NO ONE gets a Net Promoter Score of 90 !!! It means just about all your customers absolutely love you.)

Here’s what their April quarter looked like:

• Revenue: up 41%, but this is with the elimination of the pass-through hardware revenue that they are no longer counting. If you compare apples to apples, revenue was up 65.5%. That’s extraordinary revenue growth! (volfan84 note: that is right around the level of Shopify’s most recent quarter
• And for a little consensual validation, Bert called this a blow-out quarter and came to the same 66% real revenue growth figure that I did. And he’s value oriented and conservative.
• Software and support billings up 67%
• Adj Gross Profit up 57%
• Adj gross margin of 68.4%, up from 61.2% !
• Adj Net Loss of $34.6 million, improved from a loss of $45.7 a year ago.
• That’s a loss of 12% of revenue, down from a loss of 22% a year ago, as well as the dollar loss decreasing.
• Adj net loss per share of 21 cents, improved from a loss of 32 cents.
Cash was $924 million (volfan84 note: with LT debt of $423M this net $500M cash position means their enterprise value is only $6.3B compared to their market cap of $6.8B)
• Deferred Revenue: $540 million, up 62% !
Positive Operating Cash Flow of $13 million, improved from a loss of $16 million
• Free Cash Flow: A loss of $1 million, improved from a loss of $29.2 million !!!

Just read that over again and you’ll see why I don’t have to know what hyperconverged infra-structure is to know that Nutanix is a disruptive category leader. Start with this enormous growth (billings up 67%, gross margins up 7%, deferred revenue up 62%, operating cash flow of positive $13 million, improved from a loss of $16 million, etc), add on Gartner rating them #1 in two categories, and tack on that unbelievable Net Promoter Score showing that their customers are beyond satisfied. That’s enough for me.

-volfan84
long NTNX along with several NTNX call option strikes and expirations
Definitely anticipating some contrary viewpoints to this post :slight_smile:

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No.

“Definitely anticipating some contrary viewpoints to this post :)”

It’s my highest conviction stock, sold my Arista, will buy NTNX at a discount at the moment.

Yeah. I’m with what Marko says.
Good stuff this thread.

Today is just one day, but I see that NTNX is up about 3% at present. Most of that is attributable simply to the NASDAQ being up over 1% on the day, but I will be interested to see how much follow-through there may be on this move and with a possible run-up ahead of earnings season.

-volfan84
long NTNX, including several call option strikes/expirations

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Added today at 52.47

Today is just one day, but I see that NTNX is up about 3% at present. Most of that is attributable simply to the NASDAQ being up over 1% on the day, but I will be interested to see how much follow-through there may be on this move and with a possible run-up ahead of earnings season.

-volfan84
long NTNX, including several call option strikes/expirations

Continuing to track the idea of this thread. Last Friday when I posted the above, NTNX was up about 3% with the Nasdaq up about 1%, I think it finished that day up 2.something percent.

Today (7/11/2018), NTNX is up about 3.5% at present, with the Nasdaq at down almost 0.5% for the day.

-volfan84
long NTNX shares and call options

Looks like this new article on Seeking Alpha may agree a bit, maybe suggesting that the market is still not fully caught up to the fact that Nutanix is transitioning to a software-only business model.

Nutanix: Should Be Valued As A Software-Only Model
https://seekingalpha.com/article/4186643-nutanix-valued-soft…

Nutanix is the undisputed leader in the hyper converged infrastructure, a rapidly growing area for large enterprises.

Investors are not appropriate valuing the company based on their revised software-only model.

Recent 15% pullback provides a great opportunity to take advantage of this undervalued, high-growth name.

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This Seeking Alpha article seems to he indicative of “the market” failing to believe that Nutanix’s meteoric rise actually had some logic behind it. This guy doesn’t seem to have fully understood the business model shift, with the associated masked growth rate…and brushes away the nearness to profitability of Nutanix.

Nutanix: Switch To Calls https://seekingalpha.com/article/4190355?source=ansh $NTNX

-volfan84
Long NTNX, including some calls

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From Saul after last quarter (late May 2018…or maybe beginning of June):
Just read that over again and you’ll see why I don’t have to know what hyperconverged infra-structure is to know that Nutanix is a disruptive category leader. Start with this enormous growth (billings up 67%, gross margins up 7%, deferred revenue up 62%, operating cash flow of positive $13 million, improved from a loss of $16 million, etc), add on Gartner rating them #1 in two categories, and tack on that unbelievable Net Promoter Score showing that their customers are beyond satisfied. That’s enough for me.

Nutanix infographic:
https://s21.q4cdn.com/380967694/files/doc_financials/2018/q4…

For these numbers in the most recent quarter announced here on August 30th:
Software and support billings growth: 66%
Deferred revenue: 71% growth YOY (faster than the 62% from last quarter)
Gross Margin: up 15% YOY
OCF: $23M for the quarter
NPS: still 90

Seems to me that the market’s initial AH reaction was rather mixed up. Nutanix’s financials don’t lend themselves to overly quick quant algo-based trading at all, imo…and in some ways that is a good thing.

-volfan84

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Is it the market that is mistaken here, or is it us?

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Markets do what they do for whatever reason they do it. The big issue with Nutanix is Xi. Xi is now scheduled for GA at the end of the year, nearly a year late, if Xi falls into next year, or if Xi ends up not working at all, that is a huge hit for Nutanix.

Thus to go along with the financial perception, that some understand and others do not (or don’t care to understand - this is representative https://www.barrons.com/articles/nutanix-earnings-misses-sto… of the general perception - and indeed Nutanix has mentioned that instead of improving its financial metrics it intends to grow spending in 2019 to launch and proliferate all its new products and initiatives), there is real execution risk here as Xi is critical to Nutanix’s future and some of its new products come under the Xi umbrella, and Nutanix already has competitors who have rolled out their own cloud convergence products, so Nutanix is playing a bit of catch up here.

In addition, there is always the bear tails, the most comprehensive of which is https://www.forbes.com/sites/greatspeculations/2018/02/21/st…

There is also fear of Nutanix losing marketshare to VMWare and Dell dumping on Nutanix. So a bunch of FUD hanging around and circling. I bought a lot of shares today with the plunge, and I am going back to work.

Tinker

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Here is the best numbers we have on marketshare. Note there are multiple measures of marketshare based upon hardware, software, and different penumbras. Since Nutanix is now 91% a software company and hoping to move that to 95% by next quarter or so, the most relevant number is software, no matter on which server the software is placed. By this measure the Q1 numbers by IDC are as follows:

In the software view, VMware and Nutanix generated nearly 70% of the HCI market. VMware led with $456.3 million, a 109.5% year-over-year spike. Its market share of 37.2% increased from 31.3% a year ago and 32.4% in the fourth quarter. HCI systems with Nutanix’s core HCI software generated $398.7 million in first-quarter revenue, 85.5% year-over-year growth. Nutanix’s 32.5% market share increased from 30.1% a year ago and 29.5% in the fourth quarter.

There was no one else with more than 5-6% marketshare (Cisco and HPE) thus it is really a two company market with niche players on the side trying to churn a buck.

Note that Nutanix software share should rise in further quarters (this is from Q1) as Nutanix continues to make enormous progress in moving to software only. Nutanix also disputes the growth figure for VMWare and that it is not the leading marketshare holder. There are technicalities and what not in how it is counted, and what analyst, who says he saw the detailed report, broke it down into segments to get rid of the technicality biases, and Nutanix was the share leader by this measure. So who can say. What we can say is that VMWare and Nutanix dominate and are neck and neck.

The other important marketshare number if Dell, because the fear is that if Dell gets too much marketshare when you combine VMWare, EMC, and Dell, that Dell can start to dump Nutanix from its servers. And 10% of Nutanix’s billables come from Dell servers. Critics will say that Dell, between the hardware and the software now controls 49% of the industry and growing and thus they can move shortly to lock Nutanix out from their gear.

What is ignored in that argument, is that of the hardware products that Dell sells into this market, the product that Nutanix runs on is their #1 selling product. Thus Dell would need to upset customers and lose sales to someone else’s hardware. Hardly something one would think that a well managed company would want to do. But who knows what the MBAs may be cooking up on their spreadsheets.

With an installed base of 10,000+ and growing, with revenues having grown 4 fold in 3 years, and expected to do just a big less in the next 3 years, with a enterprise value to sales ratio of 5.7 or thereabout, what you gonna do.

Wait through the WoW as things gradually clear up for better or worse? That is pretty much the Nutanix investment for the moment. Not a bad place to be as long as business momentum continues forward as it has in the past.

Tinker

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