Cheap get cheaper?

Two great examples that further illustrate the near 1005 correlation to this truism.

Nutanix, after a recovery based upon faith that management had fixed its sales problems (despite the fact the market it created and supposedly dominated was growing at 60%+ - but still they had problems selling their product - which could be seen in regard to their numbers. They are constantly throwing more money at less sales efficiency - but ignore this many did) is crashed down 25% again and is yet…gulp…CHEAPER!

Elastic, which was “cheap” but far from textbook cheap (meaning still overvalued by rule of thumb measures - but we know what “cheap” really is) manages to keep on churning out its good numbers.

Thus, yet another of an umpteenth example of textbook cheap being the literal kiss of death. We want to buy cheap, but the term “cheap” is a term of art, and at least in my book it means incredibly overvalued from what the textbooks would tell you, but undervalued based upon the companies actual performance.

Elastic continues to perform well, and never got textbook cheap. Nutanix, you still gotta hope it problems are just sales related, nothing else to see here. Just a sales blip…except in a market growing at 60% and just crossing the chasm if brokerages are to be believed.

Tinker

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Nutanix, after a recovery based upon faith that management had fixed its sales problems (despite the fact the market it created and supposedly dominated was growing at 60%+ - but still they had problems selling their product - which could be seen in regard to their numbers. They are constantly throwing more money at less sales efficiency - but ignore this many did) is crashed down 25% again and is yet…gulp…CHEAPER!

I wasn’t going to post on NTNX here since it is so out of favor with this board, but here is a cross post of what I posted this morning on one of the premium boards. I actually believe this quarter’s results and the guidance from NTNX are both pretty great and I took, what I believe to be a general misunderstanding of their results and report, as an opportunity to further add to my position

xpost follows:

I know many people look unfavorably at NTNX are going to say “here we go again” or “I told you so”, but I don’t see the results or the outlook reported yesterday as anything other than really good.

They beat solidly on the quarter just ended, their move to subscription is way ahead of schedule (which is part of the reason that their revenue and revenue guidance are being misinterpreted, because there is less revenue upfront with subscription, but it is great for recurring revenue etc long term). Margins are improving faster than expected too. they said they are going to keep investing in their sales team, but slow hiring for non-sales folks which should help the bottom line and cash flow in the short term.

The biggest concern is that they don’t seem to be broadcasting backlog/pipeline this quarter like they have in the recent past, so that does give me slight pause.

If you have NTNX shares and are contemplating selling them, or are on the fence about buying, I highly encourage you to listen to the replay of yesterday’s investor earnings call. Management sounded extremely upbeat. the move to subscription, particularly its acceleration has somewhat of an impact similar to some companies that moved away from pass through revenue in recent years. It makes the comp’s seem less-good than they actually are. Yes, it makes the current revenue look only a few percent up from the comparative period, but as that move to subscription flows through the prior period comparisons over the next few quarters, after swinging from -1% growth at the end of last year to +1% last quarter, to +3% this quarter, and their future revenue growth, at the midpoint of guidance (which btw they have consistently been beating the high end of their guide in recent quarters) would mean +10% next quarter and +25% in the following quarter.

and to reiterate, that doesn’t mean their bookings need to suddenly grow 25% in six months, the bookings have consistently been growing at a much higher rate than revenue. Just a continued progression in bookings like they have been will lead to at least 25% revenue revenue six months from now. For a company that is already doing $350 million of revenue per quarter, (a lot more than most of the tech companies I am invested in), that will be an incredible growth rate if it goes back to 25-30% later this year and stays there for a while, which I think is very possible.

And note that this isn’t some sudden surprise or some grandiose unrealistic promise from management. This is consistent, even muted, compared to what they have been telling shareholders would unfold over the year.

Deferred revenue is now over $1 billion, which is great and almost half of the deferred revenue is short term and will hit revenue over the next 12 months.

This is far from a guarantee, but I think the market is really mis-reading the results here knocking the stock price down -25% this morning. Not to mention that at a market cap now of $4.7 million, Nutanix continues to be a prime target for a takeover. I hope that doesn’t happen because I think shareholders can be a lot better rewarded by them staying independent and publicly traded, but it wouldn’t shock me at all of someone tries of buy them for twice what they are selling for today.

Maybe I’m wrong, maybe this is a falling knife, but I added a significant amount of NTNX this morning right at the open. Last summer when the stock price was in the teens, I thought NTNX was the best place for my money and so far, even with this drop today, it has done really well since then. I can’t help but feel that NTNX could be my best performing investment over the rest of 2020 from here as well.

-mekong

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General misunderstanding of their earnings?

Same thing Bert said last year or was that 2 years ago now.

Same thing Nutanix supporters keep saying. Yet what do we have? Marketing expenses up and sales down.

Maybe after the coronavirus goes away…

What gets me is that despite the rapid growth of their market, their leadership position w in the market they are still blaming tough comps from more than a year ago.

I don’t buy and never buy “market just did not understand” if it is related to fundamentals and not some real FUD event unrelated to fundamentals.

Tinker

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What gets me is that despite the rapid growth of their market, their leadership position w in the market they are still blaming tough comps from more than a year ago.

Nobody is saying that. I haven’t seen anyone blame Nutanix’s problems on tough comp’s at any point since I started following the company a couple years ago. Blaming something on tough comp’s is very different than misunderstanding that the prior period reported revenue is not apples to apples with the revenue being reported today. Pretty soon that won’t be an issue.

Nutanix had a really bad quarter in early 2019. They warned shareholders about it months before it was reported. It ended up being even worse than they initially thought. Yes, this was really bad and definitely scared most investors away from the stock for good.

However, the past three quarters, they have delivered as much, or more, than I could have asked, three times in a row. To me (and anyone looking for an opportunity to increase their position), it is very lucky that they announced right in the midst of the market beating this week.

Most people won’t touch NTNX stock today and I don’t blame them. but I like what I see with yesterday’s earnings release and call

-mekong

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I won’t clog up the board with arguments of history that we have all read. What I will bring up, consistent with my theme, cheap is cheap (and now it is cheaper) while Zscaler remains up, and Elastic (about even) - the cheap, Nutanix, is down 52% over the last year and continues falling.

Cheap in the way I use it is a proxy for assessing investments. From there you can hear all the reasons and sometimes these reasons are excuses why. The most fundamental is “the market just does not understand it”. The market always understands straight forward fundamentals. And cheap (textbook cheap) almost always gets cheaper.

One could run a data analysis on this, a regression analysis, whatever you want. I have been on this topic for a while now. It is anecdotal, but talking more than a dozen examples by this point, I have yet to see one single (not a single) exception to this rule. Even amongst a possible Gorilla (Nvidia).

Nvidia was a great investment when it was outrageously expensive. It became an awful one when it became textbook cheap. In fact, Nvidia only turned it around after hitting a new S curve, having worn out its own S curve.

Arista was a great investment when it was outrageously expensive. When it became conventionally valued it has been an investment that has fallen behind the market. Arista ran through its S curve on 100 gb/sec. Supporters remained behind it however due to its now conventional valuation.

Both companies remain incredibly profitable, and incredibly well managed. Nvidia is booming again as it is going up a new S curve in AI and graphic chips. Arista is having a harder time because now, like Cisco, and Juniper, and Network Appliance and such, it has run through its S curve. Its next markets are not Tornadoing, and Arista does not have the same disruptive advantage it had when the cloud titans were building out a new market.

With such examples and lessons, why is Nutanix the exception? What new S curve do they have to climb? Or are they just cheap?

Tinker

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the bookings have consistently been growing at a much higher rate than revenue

Mekong,

I find this to be a gross mischaracterization of the situation.

Yesterday NTNX lowered guidance for fiscal 2020:

Billings: $1.67b at the high end (from $1.75b)
Revenue: $1.36b at the high end (from $1.40b).

Just over a year ago, the CEO was repeatedly promising $3b in 2021 billings. Even if they hit the $1.67b for fiscal 2020, in 2021 they won’t be anywhere close to the $3b they were so recently confident they could deliver.

Back then billings were growing at 60%+. Now it’s half that or so? How can you believe they’ll even be able to keep that up?

Bear

PS Also, to make matters worse, their OpEx spending and their operating losses have ballooned. Combine that with slowing billings and you have a disaster. I don’t see signs that NTNX is turning around.

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Bear

“the bookings have consistently been growing at a much higher rate than revenue”

I find this to be a gross mischaracterization of the situation.

You say this and then you go on to quote numbers that support what I said:

Billings: $1.67b at the high end (from $1.75b)
Revenue: $1.36b at the high end (from $1.40b).

Yesterday NTNX lowered guidance for fiscal 2020:

Yes, they did, according to what was said on the conference call at least some of this was due to uncertainty around the coronavirus. But even if they don’t quite hit those numbers, I believe NTNX stock will gain pretty significantly from here. It’s priced based on expectations that they won’t even come close to that.

Just over a year ago, the CEO was repeatedly promising $3b in 2021 billings. Even if they hit the $1.67b for fiscal 2020, in 2021 they won’t be anywhere close to the $3b they were so recently confident they could deliver.

The point is that they don’t have to. I’m not buying NTNX today banking on them hitting $3b next year. Even if they don’t start running at 30%+ growth a couple of quarters from now (which I think they can), even if they only grow at 20%+ next year, I believe the shares will be worth a lot more than they are today.

Late last summer when the stock was in the teens, I said on this board that NTNX only had to grow in the single digits in order for the stock to be a good investment. Ultimately since then, NTNX has barely even grown revenue in the single digits and despite that, even with today’s drop, the stock is up 30%+ in the midst of a really bad week for the stock market, which is better than the majority of the SaaS stocks that we follow have done since then. (Yes, sometimes valuation does matter)

Back then billings were growing at 60%+. Now it’s half that or so? How can you believe they’ll even be able to keep that up?

The three most recent quarters in a row they have exceeded expectations. Before that, they had one very bad quarter. Before that they were consistently exceeding guidance and expectations. I guess I would turn your question around on you. What makes you think they can’t do it? Sure, things could all turn south in a heartbeat, but considering the price that NTNX shares are selling for today, I like my chances.

Ultimately, I get it. Nutanix has been the furthest thing from a smooth ride since it was briefly very popular here a year ago. That’s why I originally only posted on the premium board this morning, and maybe I should have left it at that.

-mekong

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The trouble is that some just can’t see what others can. What an opportunity we have, be it tomorrow or yonder to pick up Stocks that have already proven themselves to be worthy of our conviction. Sometimes it’s better to move on and not keep thinking what it could be as what you wish for may never happen. Respectfully.

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The trouble is that some just can’t see what others can. What an opportunity we have, be it tomorrow or yonder to pick up Stocks that have already proven themselves to be worthy of our conviction. Sometimes it’s better to move on and not keep thinking what it could be as what you wish for may never happen. Respectfully.

That sounds very much like what you said in August here, branmin:

https://discussion.fool.com/i-was-like-you-mekong-up-until-about…

…once a stock is broken, perhaps you should just move on? Look forward rather than backward regardless what “could be”. You could be right in the end but it’s more about your mentality in dealing with what’s happening now as opposed to what could happen in the future.
Sometimes it’s better to just let it go…

Since that post on August 2nd, NTNX is up more than +10%, while the majority of the SaaS stocks followed here, including OKTA, CRWD, etc are down over that same period. CRWD is down -40% during that time.

So at least so far, my decision at that time to move funds into NTNX has worked out a lot better than had I moved those funds into other stocks.

Also, not to belabor the point, but this is a particularly important quote from yesterday’s press release:

Reached 79 Percent of Billings From Subscription, Well Ahead of Plan: Nutanix continued its transition to a subscription-based revenue model, outperforming its internal expectations, with subscription billings up 45% year-over-year to $339 million

So almost 80% of their billings are subscription. And subscriptions billings are growing at 45%. And revenue lags billings. Still hard to imagine how Nutanix’s revenue could soon be growing at 20%+ or 30%+ or 40%+ again in the not too distant future?

I can

-mekong

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Good discussion, each to their own. However, Nutanix’s share price is up around 40% from its IPO that was multiple years ago! Nutanix’s prior crash price, after the Oct 18 and Dec 18 “historic” market crashes was down to $32 or $34. Even since the historic market crash Nutanix is still down 25% from those rock bottom prices!

Yes, if you bought at the 52 week bottom of $17.50 or so you are now up $6 a share or less than 30%. This is using best case scenarios. BEST CASE SCENARIOS. You bought at the IPO. You bought at the historic crashes of 2018 bottoms. You bought at the 52 week bottom. Using these best of best best best best cases, Nutanix is up 30% or so after multiple years, or down 30% or so after 1.5 years.

Has the market simply misunderstood Nutanix all this period of time? I blew a double on Nutanix in 2018 and ended up selling it for only a 50% profit after their first horrific earnings. I bought it at a great time (and that then great time for a buy is now 30% or so higher than now). At that time Nutanix, for ONE QUARTER, became the leading HCI vendor in the world!

Yes, but as is so often the case one data point (and you have to jump on them some times because what else do we have) turned out to be a one quarter fluke. So I jumped. Took my profits and ran. Sure, since then Nutanix went up and then way down, and then back up to where I was to begin with, with a 50% profit.

So my question is, the fundamentals suck! There is no other way to say it. Growth has been in the gutter. Nutanix focuses on proxy points to show revenue growth. The stock market has misunderstood this so much, and for so long, that even during the latest bull market (interceded by the coronavirus thing now) that Nutanix (cheap) has fallen well behind practically everything else (including Zscaler - but their latest billable growth like OMG!). So a question, why?

It almost sounds personal. And we do form personal relationships with stocks. It is a bad habit. We also create morality from holding long. And doing nothing (duh) is a great strategy. Except doing nothing does not mean always do nothing. So why would anyone want to hang on to a stock like this that has over-promised and way underdelivered for years, with the stock market misunderstanding it all along the way?

Part of the discussion, not a personal attack or any such thing. I just think the facts here, the evidence here, how they apply to methodology here, are simply overwhelming and trying to understand why hang on here? I get this way sometimes.

Tinker

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Fair enough Mekong. Can only wish you well and trust it fulfils your expectations and trust you don’t have to wait too long to do so.

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