At the beginning of the year, many of us had great expectations on NTNX’s 2019 performance. We were stung by the company’s last ER. What went wrong with our investment thesis? Looking back at the discussions on this board, I think we liked NTNX because of the many “great products” it offers and its technological leading position in the HCI field, combined with its cheap share price compared to other Saas stocks. Do you see the pitfalls here? Obsessions with “great products” and “cheap stock” failed us.
Except for MDB, most of the companies we invest in have released earnings by now. Here is my ranking of the tickers based on the latest ERs, following Saul’s ranking system:
6* (in order): TTD, ZS, AYX, TWLO. I could not find anything I don’t like about these companies. I put TTD and ZS in the 1st and 2nd places because of their profitability. I like TTD the best.
4.5* to 5*: OKTA, ESTC and maybe MDB (let’s reevaluate it next week). The only thing I don’t like about these companies is their spending and not going to generate profit for a while. - I may slightly reduce my allocations on them in the future.
4 Stars: SQ. It’s a “complex” company offering too many products, failure in execution in anyone may bring negativity to the performance, and also stock price. In addition, it has too big a market cap of ~ 30B. - I have sold all my shares as of today.
Here are my thoughts for future investments:
Don’t fall into the trap of “Obsession with great products”.
Price (P/S ratio) is the least important factor to consider when investing in SaaS companies. Focus on growth acceleration and profit expansion instead.
The best companies are the ones both growing quickly and highly profitable (or projected to profitable in a short period).
I also have ANET (I will give it a 4.5*) in my portfolio. It’s not a SaaS company and grows slower but more profitable. Performance suffered last year. Turned more positive recently. I think it’s a good one to have for now - it keeps my portfolio somewhat balanced. I may slowly reduce it though, look for good opportunities to add to TTD and ZS.
As Don Johnson in Miami Vice TV show said:
“It ain’t over 'til it’s over”
I sold out NTNX pre-market and saved a little compared to those that sold out when market opened.
However, my 2 cronies here at work that follow the Saul reality didn’t sell there NTNX, they added more to their small positions. And. . . .I don’t recall anywhere that Saul has sold out his NTNX. So I am having second thoughts.
I appreciate your take. For the record, I have owned and still own NTNX.
I learned several lessons: #1. Price (P/S, etc.) should not be a primary reason to buy or not buy a growth stock. A lower price can actually be a negative since it indicates the market has a lower confidence in the company’s growth outlook. But it is a consideration. And it can be a positive if your research indicates it is undervalued - unfortunately, the market usually knows more than you do. #2. Relative strength (related to the price) can be an omen of things to come - NTNX’s relative strength was not great prior to earnings. #3. Any individual stock has significant risk and there is value in diversification.
As for NTNX going forward, the jury is still out. Other companies have made similar transitions and hit similar speed bumps (for example, I think TWLO hit a bump before it’s recent meteoric rise) before turning the corner. Buying or holding at the lows has turned out to be the most profitable of any decision. Since NTNX is only one investment among many in my port, my understanding of the company is now better than other positions and some expert analysts now think it has a superior risk/reward profile, I will hold for now. I will not add since I already have a large enough position, the story is more complicated than I prefer and expert opinion (some here) is divided.
As for your ranking of other stocks (which I all own), I generally agree with the exception of SQ. Its diversified products actually make it less risky and it does not have a large market cap given its TAM. It seems likely to produce market beating returns for the foreseeable future.
Great article. Reminds me of my first stock purchase a long time ago, in Borland International, simply because they had some of the best compilers available, as well as a great database. Great products did NOT turn that into a great stock, or a great company, unfortunately. The engineer in me never likes to admit this, but how a company is managed is often more important than the quality of the product.
On Saturday March 2 in the thread “NTNX Apologies and Updated Thoughts”
(I sold all my Nutanix Friday, starting in the pre market at $38.50 and all the way down to $34.25. I bought some of the above and they all finished above my purchase prices. Nutanix finished below all my sell prices.)
There were a couple more reasons why we were excited about Nutanix. Apart from many new cloud products and duopoly in fast growing HCI, (Gartner leader and NPS>90), we thought NTNX was a hidden growth (SW) story as they were transitioning from hw to sw. As the hw stabilized to 5 to 10% we thought the 40%+ sw growth will be recognized by the market and the market multiple will adjust accordingly. The sharp slowdown from the 40%+ sw growth is the main issue now. I am curious on what they say about that during the investor day event on 3/20.
Interested in your reasons as to why you sold SQ. What was your thesis when you orinally invested in it?
Did you invest due to its hyper growth? Software is now over 40% of revenue, growing at a rate above 100% pa. The software side of the business is the most profitable. So thesis looks intact here.
Market capitalisation being too high. What is too high? There are hundreds of millions of small businesses globally, with trillions of dollars in annual revenue. I think SQ has hardly scratched the surface.
SQ is a good company and a good investment. But, to me, it is as attractive as ZS and TTD. I got out it mainly because I want to want to streamline my portfolio.
I have to admit that the discussion on this board has re-shaped my investment strategy. I am switching my portfolio from a “diversified” to a “streamlined” one, by choosing 6 to 7 highly convicted companies to invest for the long term. For this, I am looking for super-promising and clean tickers (IMO, of course). SQ does not fit into this category. I have settled on four tickers: TTD, ZS, AXY, TWLO; most likely candidates: ETSC (need a little more time), OKTA and MDB.