NTNX revisited

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NTNX revisited

I first learned about NTNX from Saul last September. Saul had heard about it from Bert I think and asked me if I would like to analyze it. After looking at it closely, I purchased a substantial position and posted two posts to this board. The posts are here and I think they are still worth reading:

http://discussion.fool.com/ntnx-fast-grower-and-a-bargain-price-…

http://discussion.fool.com/ntnx-how-to-value-the-company-3284049…

Here is what I wrote back then:

So what we have is a software company valued at a hardware company. Of the total revenue it’s 75% software and 25% hardware. The software part is growing very fast(SW bookings grew by 96% last quarter (yoy)) and has high margin(>90%). The hardware is jest a way to sell more software. Software margins are 90% while hardware margins are pretty much nothing.

So to value NTNX, let’s remove the hardware part. 75% of $846M is $634.5M. So now we get the EV/Sales:

EV= market cap less net cash: $3.4B - 0.35B = $3.05B

EV / sales = $3.05 / $0.6345 = 4.8

Now let’s compare NTNX to other fast growing tech companies with high margins:


	        NTNX	SHOP	TWLO	HUBS	TLND
EV/Sales	4.8	21	7.6	8.1	8.2
Rev Growth	96%	80%	58%	42%	43%
GM	        90%	81%/36%	56%	79%	76%

[Figures in above table are from 9/2017]

Based on the revenue growth and the gross margins, NTNX looks even better than our other fast growing tech companies. Yet the multiple is substantially lower. While I’d like to find out why hardware storage companies are valued on a 2x multiple, I think the revenue growth and gross margins of NTNX’s software business very much justify a valuation inline with our other high tech fast growers.

Since NTNX’s margins and growth is better than these other companies, its valuation should be higher. I’d say at least a 10x multiple is warranted.

That would give a share price of about $46.50 or a 108% upside from the current price. This is why I took a large position in NTNX.

Fast forward to today. The stock is now at around $54. So one might ask is NTNX now fully valued, is it time to sell, or is there much more growth ahead?

NTNX just made public a new investor presentation. It can be found on on SA at…

https://seekingalpha.com/article/4155979-nutanix-ntnx-invest…

If you are investor or considering to be one then this presentation is definitely a must look.

Here’s what I think now. NTNX is no longer valued as a hardware company. It’s EV/Sales multiple is now up to 8.2 up from 4.8 in September. I think it’s still a bit too low but not that different from the other faster growing SaaS companies that we can choose from. Also, perhaps we should look at EV/Bookings which would give NTNX a slightly lower multiple of 7.4. If you look at a more mature giant SaaS like Salesforce (CRM), you can see that the EV/Sales multiple is 8.4. This means that we might expect NTNX’s multiple to be maintained as it gets bigger. I would argue that NTNX deserves a higher multiple than CRM because it is growing faster.

Now if you review the new investor presentation, then you will see they have outlined a plan to grow revenue to $3B by 2021 so around 3 years from now. I think the plan is very credible and the outcome is likely. I would think that they will probably even outdo their own targets. Why?

  1. The NPI is 90 which is the highest I’ve ever seen. This means customers are delighted by NTNX and are recommending it to others. This means their customers will not only not leave but will spend more: land and expand is working.

  2. Their historical data and trending analysis shows that they are on track.

  3. I just loved slide number 58! Their last earnings report was absolutely amazing, but this slide is saying that they don’t have enough sales and marketing people to win all the business that was available to them in the first half of 2018. They are spending and growing as fast as they can and once they fully staff sales and market they will reach their sales potential. They expect $509M in billings in the first half of 2018 but they think they could get $689M if they were fully staffed. Lots of growth is coming.

  4. Slides 52-57 show their Rule of 40 analysis and approach. It’s compelling and it makes sense to me.

  5. The shift from pass-thorough hardware to software business model won’t be complete until later this year so many of the financials will continue to improve.

OK, let’s assume that they hit their $3B revenue number in 2021 and they maintain their current EV/Sales multiple. This means that the stock is about a triple in 3 years or 45% annualized. Now if the multiple can expand (likely, I think) and/or if they beat their $3B goal (very likely, I think) then we could see a 300% increase or 4x the current stock price in 3 years. And remember that they are only scratching the surface of their total addressable market (see slide 69).

I added to my large position after seeing the new investor presentation and doing this analysis.

Chris

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And if you haven’t noticed the stock price has been rising substantially just about every day for the past week even when the market was down. I think some big institutional investors have caught on to this gem and are loading up. They have too much money to put to work so they need to build positions over days/weeks. The stock could continue rising for a little while longer if this is happening.

Chris

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I first learned about NTNX from Saul last September.

I first learned about it last July when I saw a GS note touting it as a can’t miss opportunity. I take such sell side analysis with a grain of salt but it made me look. I loved the numbers so I took a small position. I had only started following this board and didn’t know it was favored here. Had I known this, I would have had greater confidence in the pick and taken a larger position. Once I saw the favorable analysis here, it did give me greater confidence to hold my position longer term.

It’s now up 144% since I opened a position. I only wish I had read more about it here earlier and invested more!

dave

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OK, let’s assume that they hit their $3B revenue number in 2021 and they maintain their current EV/Sales multiple. This means that the stock is about a triple in 3 years or 45% annualized. Now if the multiple can expand (likely, I think) and/or if they beat their $3B goal (very likely, I think) then we could see a 300% increase or 4x the current stock price in 3 years. And remember that they are only scratching the surface of their total addressable market (see slide 69).

Agreed, I came in July 2017 and now have a triple…but I would agree with your sentiment that should they get to a $3 Billion revenue run rate in 3-4 years, they are a likely another triple from here. I still like the odds…though this simply is inconceivable that it will be smooth sailing until then.

One interesting observation I have had in the past few years is that the market gets much more interested in a stock when the company’s revenue run rate gets to and exceeds $1 Billion annually.

Perhaps this is just a phenomenon of the more conservative investors wanting a bit more assurance that there is indeed a market for the good being sold…before they jump in a bid a stock up. But I do think this has repeated with a number of stocks including SHOP and NTNX.

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Slides 52-57 show their Rule of 40 analysis and approach. It’s compelling and it makes sense to me.

This is a nice heuristic we could use to investigate all SaaS companies. Basically, as a percentage of sales, the sum of FCF & sales growth should be 40%. It allows us to easily conceptualize what makes a good SaaS company and when it should change from focusing on growing the market share to becoming profitable.

I wonder where MDB and AYX fall on this. Given their relatively small market cap, it would make looking at their TAM with this a useful exercise.

Basically, it wold be nice to find more SaaS companies above 40% with a low market cap and big TAM.

DJ

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By the way Chris, I notice slides 52-56 seem to say add together FCFM and sales growth. Then, 40% of that sum is the Rule of 40 result. However, checking, I saw that the R of 40 is in fact simply the sum of FCFM and SG as I originally thought. Not well presented on the slide.

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DJ,
I looked at their slide and some screens and compared NOW, WDAY, CRM, NTNX, AYX, MDB, PAYC, VEEV, SPLK, VRNS, and MULE.

I don’t think this board would take a copy/paste of the sheet, but I could share it on google if interested.

Basically, my top investments (buys) are NTNX, ANET, TTD in the tech software SaaS sector, and NKTR in high growth bio.

VEEV, PAYC, WDAY, NOW are all priced high for their rev growth rates. If I wanted less risk (ie. a rule of 25 instead of 40) CRM, SPLK and PYPL are nice.

AYX and OKTA are expensive and I’m just holding, but have >+50% growth, low market caps, and debatably high TAMs, so are risky but might be worth it.

MDB is a not a buy for me. I might be wrong, and there are plenty on here or NPI that understand it better than me. but >+50% rev growth rate for P/S 13.72 seems like a lot of risk with no earnings.

MULE’s lack of earnings and high SGA pushed me away.

VEEV’s valuation is too high for its rev growth rates.

I might not be looking at the right valuation metrics though either. Just using the rule of 40.

Hope this helps
robert

VRNS looks nice, but I haven’t dug into it yet. rev growth rates of >+30% at P/S of 7.5

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Sorry.

My previous post in this thread should be deleted as I “meant” to refer to NKTR.

{{The Ides has struck again!}}

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OIFAirborne11C,

MDB is a not a buy for me. I might be wrong, and there are plenty on here or NPI that understand it better than me. but >+50% rev growth rate for P/S 13.72 seems like a lot of risk with no earnings.

If I understand it correctly, the 40% highlights the tradeoff between investing in growth to take share now and operating profitability,ingkeeps management focused upon when to shift from one to the other.

For example, if MDB is growing revenues at 50% and has -10% FCF (50% - 10% = 40%), they are basically plowing the cash back into growing the customer base. If their market cap is $2 billion with a TAM of $100 billion, a P/S ratio of 13.72 might not be so high, given the big opportunity.

Here is where this gets a bit more interesting. If MDB has a Net Retention Rate (NRR) of 120% (just using this as an example - I think Saul mentioned that AYX has 135%), it means that when they get a customer they sell 20% more stuff to this customer the next year. If the NRR is 90%, it means that they’re selling 10% less stuff to the same customer next year.

Clearly, I would find it a lot easier to invest in MDB at a P/S of 13.72 if their NRR is 120% (perhaps somebody on the board knows this number or has already posted it). I would like to see MDB take as much of its cash flow and invest in growth if NRR is 120%, which could make a P/S of 13.72 reasonable, because they’re growing revenues (and customers) that will grow 20% next year with little effort (and cost).

So as a heuristic, the 40% rule could be a first step to help us to screen companies.

I just recently started making sense of this and will try to do this for the SaaS companies I own. It will take a while. But it’s vital to better understand the prospects of my SaaS investments.

DJ

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DJ their net retention rate was 119 last Q and has been rising but always, to my understanding to date in the 115 to 120 range.

I believe this will increase with Atlas and as the technology moves beyond the early adopters.

But to answer your question, yes ~120 w a SAM that is very large and is clearly the #1 NoSQL database, and drawing third party integrations such as one I talked about on RB yesterday. Shall need to repost here when I get some time.

Tinker

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Fourth:

I was trying to get the connection between the thread title and Mongo :wink:

IMO, one can encapsulate the unknowns with MongoDB into two broad categories:

  1. Is there technology superior to other non-SQL and can their multidocument document 4.0 allow them to invade the relational space?

  2. Do they have a business model that would allow them to exponentially grow this business?

Your question regarding NRR is a good one especially with regards to the rapid change in business strategy with Atlas…perhaps the same anxiety for investors that NTNX created with its transition to an all software model.

In the case of Atlas, they are attracting a less robust customer than was their usual enterprise subscription customer…and the market clearly isn’t quite sure what to make of that “different” customer class. These Atlas customers are largely the smaller freemium customers (30 million download folks) that have a way to latch on in a hosted fashion with lower cost.

But, at the last earnings call, they seem to be a mix of both enterprise and those previous Fremium customers…and VERY important as regards your question, they said this about the Atlas customer:

We are seeing actually even greater land and expand characteristics than the already strong behavior that we see in our annual subscription business. So, we are benefiting from that as well and then I would also say we’re seeing a number of customers who are already enterprise advanced customers expanding their relationship with us and adding Atlas and managed offering for additional workloads of theirs.

So, Atlas just ground everyone, the main difference while it’s still a subscription product as it’s still monthly based on usage as opposed to flat fee for term license just to ground everyone in that. So from a revenue recognition standpoint, it’s fairly straightforward, it’s consumption based, it’s based on the actual usage as opposed to a ratable revenue recognition treatment, but assuming the same amount of usage over a period, the revenue recognition would look pretty similar.

So in the case of MongoDB…Atlas began just 1 1/2 years ago and now with 500% YoY revenue growth…I have “back of napkin” modeled just Atlas revenue alone with a decaying growth %, and IMO, this can get to $1 Billion revenue run rate in 3-5 years.

But, just to be clear, I doubt this stock runs away from anyone at this point…there will be more opportunity to take a bite of this apple…so no rush…maybe even wait until after the stock lockup expiration…this is a very risky play.

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Tinker,

I believe this will increase with Atlas and as the technology moves beyond the early adopters.

MongoDB as well as the hosted version, MongoDB Atlas, are licensed based upon the size of the database. The price/performance curve is pretty steep. But the the fee keeps going up with the size of the database & RAM. This is the likely reason for the high retention run rate (the amount of data is exploding and RAM is cheap).

For MongoDB customers wanting to migrate to the Atlas service, it will certainly cost more, increasing the revenue retention rate. I wonder if new customers getting onto the Atlas service will show a better growth profile as those managing their databases themselves.

I also wonder what the sales cycle is like, if they do a lot of commercial and legal negotiations when executing contracts. Theoretically, using the Freemium model, the need to negotiate is probably a lot less than if they had to drum up paying customers from the start. Perhaps I can find out something about this.

The relatively low market cap and SAM make these metrics look interesting.

DJ

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DJ,

You might be correct about the 40% rule, it is new to me and I am still trying to understand it, but NTNX p/s is at 8.65%. I only make that comparison because I am trying to sort out these high growth SaaS/Cloud companies and want to put my money into today’s best of breed winners. It is tough competition right now.

And all the numbers in the world wont make a difference if luck, emotion, product viability, and the market decide to negatively shift. I also agree that TAM would play a factor, but I am not sold on MDB TAM.

I do like the NRR or DRR that you and ethan (?) have brought up. I would like to know NTNX’s if anyone wants to share.

Robert