Friday 31 May. A 17% AH drop after their Q3 earnings report.
Nutanix is a perfect failure on my part. Here, I look back on my process failings, and try and analyse them so I can improve.
Saul (and many, many others) called Nutanix previously, and I ‘disagreed’. For example, Bears “things you need to believe” looked like:
- They will be able to find new customers that spend as much as current customers
- Subscription growth will continue (once all the non-sub revenue is robbed) for years at 30%+
- They won’t have to spend so much more on sales and expenses that they fail to profit
- HCI won’t be displaced by another technology for years
- The market will at some point also believe all this and value Nutanix more highly
- There’s a greater likelihood that all this is true than that your money would do better elsewhere
Tinker said: “However, it is clear the business model is broken. I won’t go into detail here as it is in the above link, but also another concern, and that is growth rate.”
It might be the American accents, but I didn’t get it. It wasn’t that they were pointing out that Nutanix did badly, that was obvious. What they were pointing out was that They didn’t believe management.
I ignored all of that. Even worse, as a tech person, I ignored some of my own thinking with respect to Nutanix, including being unsure of Dheeraj’s technical explanations for Xi delays, concern (posted on the board!) that they were trying to reinvent AWS, and disappointment in the “word storms” that the Nutanix conference calls involve.
My process gets worse. They had a bad quarter last quarter, which was the subject of numerous comments. Despite all the comments, I gave them the benefit of the doubt - sure, you can make a mistake, live-and-learn, hire some sales people, fire some peeps, move on and ride the HCI wave!
That’s fair enough, it’s a kind of reasonable explanation. The (massive/costly) mistake I made was not adjusting my probabilities based on the new information.
But it’s a more systemic failure than that, because I was stuck in “portfolio thinking” (these are my terms, YMMV)
Portfolio thinking: Risk and allocation are calculated as a percentage of the portfolio - Nutanix is 5% so small risk, no readjustment required.
Company thinking: The amount allocated to that company is all that’s important, not its relative size in the portfolio. Risk is dealt with by changing the allocation in that company. New information about that company should cause a readjustment of whatever capital is in that company.
When I look at Saul (in particular), my belief is his focus is almost 100% on ‘company thinking’. There’s a bit of ‘portfolio thinking’ (limiting stocks from getting too large), but he allocates on company news, and doesn’t let the relative size of the position in his portfolio impact his allocation decision. That’s why (I believe) he’s in so few stocks, because doing that for many would take up more hours than exist.
In hindsight, the process is simple:
- Do I have new information on the company?
a. N: Do nothing
b. Y: Is it positive or negative?
i. Positive: Risk down. Look to allocate more capital (other valuation metrics might be valuable)
ii. Negative: Risk up. Deallocate capital. Not negotiable.
The ‘negative’ deallocation is not negotiable. To not do that is to say “I have new negative information that I wasn’t expecting, but my belief in the company has not changed”. Huh?
My cost base for Nutanix is $42. I originally bought around $27, so was up substantially at points-in-time. Looking back, most of the rationale in higher value purchases was the fear-of-missing-out (FOMO). Everyone else was making big gains, I wanted in!
So Nutanix = Portfolio thinking + fear of missing out + a bit of anchoring.
Nutanix is now a 35% loss as at after-hours prices, which is not normal on Saul’s board. Fortunately, I’m not confident enough in my thinking to allocate large percentages to a single stock, so my Nutanix loss won’t kill me (portfolio thinking), but it hurts, mainly because I should have acted (because I had new information - company thinking) and didn’t.
I’m aware this is a report based in hindsight, and the emotion of a 20% drop in a stock. Tomorrow, I will sell a to-be-determined percent of Nutanix, possibly all of it. My underlying concerns (they’re trying to build AWS, and people aren’t buying) exist. There is still a possibility that the “we didn’t hire the salespeople” explanation will work out, but with 2 disastrous data-points, I have to readjust the company significantly.
Better late than never I guess. Hope this is helpful to others.