Saul and Bear… thank you for your continued monthlies…
Just brilliant,like this board and the posters therein, not much more that I can add. Fully deserved.
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My thoughts about Nutanix’s results are the same as those of Bert and others: the results were misunderstood by robo-analyzers
We have discussed what has caused the share price to drop and fall to very low forward valuations. Many possibilities, one for sure was a short attack w false Google article followed by analyst serious downgrade calling Nutanix a “second source” to VMWare, which is absurd, but whatever.
Rob-analyzers? I am sure they are out there I have just never considered them before analyzing fundamentals. Bert I would think would be quite up to speed on these things however. If this is a material issue, then this time next year, assuming Nutanix business continues to grow as it has and we think it will, it will be nearly an apples to apples comparison and that robs-analyzer will be calculating revenue acceleration from 12-15% to 50%! Now what it does with it I don’t know but if I were a computing machine my algorithm might get pretty excited about that.
TBD. The current Nutanix situation is very similar to what caused Nutanix to crash back in 2016, so not unexpected, and it is almost as if there was a gap to fill from when Nutanix went nearly straight up after announcing its software only strategy. Who knows, but the more I try to hypothesize the bearish issues the more bullish one seems to get.
We can’t all be wrong, can we? Don’t answer that;) I do not want to know the answer.
Tinker
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Saul,
Once again, thanks for a great write-up! It’s obvious that you don’t do these monthly reviews simply for the benefit of those of us who read your posts and try to emulate your style of investing. I’m confident that they assist you in sharpening your own thoughts about your investments. I’d be curious to know if you did something similar prior to starting this board. I don’t recall that you specifically recommended monthly reviews in the Knowledgebase (it’s been a while since I reread it), but if not, you might consider adding this practice. It’s something I have not really engaged in, but I think I will start, if only for my own benefit.
Separately, I’ll add just a few words about some the companies we hold in common where I think I can add some understanding about what they do and what gives them a moat:
Twilio. They provide communication services and they seem to have no viable competition in what they do besides do-it-yourself.
I’ll just shed a little more light on that subject. Much was said about Uber deciding to to roll their own. But not much was said about what might have motivated them. Communications and telephony reside at the very heart of the Uber business model. In fact, IMO ride hailing is actually an outgrowth of what they do, obviously, an important one and I’m hard pressed to come up with a better one, but it is the communications functions that enable the service. In that Twilio has a transaction based fee structure and Uber is a communications transactional enterprise it undoubtedly made economic sense for them to self provide in order to escape the fees.
But this is far from the norm for most companies. Most companies, are engaged in some other business and rely on Twilio enabled functionality primarily to provide customer support or sales functions. For those companies digging deep into the weeds of communications protocols (and these are very deep weeds) would require a hiring a handful of specialists who would inevitably become an IT bottleneck as their workload would be sporadic. The tendency would be to under-staff these high paid positions.
Enter Twilio with a library of APIs that most programmers can master after an initial training period. And there’s no annual subscription fee for the libraries, you only pay for what you use when you use it. What’s not to like? Virtually every company big enough to have an IT department will need some communications functionality at times. Twilio makes it easy and standard. No risk of two specialists coming up with different solutions for the same problem.
How about competition? I already discussed the special case of Uber. And yes, a competitor could develop similar functionality, it’s not that esoteric. But if you’re hiring IT staff why would you go with brand X? Twilio has the network effect of being first, best and getting better with an ever growing body of programmers already familiar with their APIs and how to use them. And their pricing model might be matched, but can’t really be beat, a new entrant would have to have a lot of funding to undercut their prices and survive for the long haul while playing catch up. If you’re a venture capitalist would you bet on brand X?
And just a brief word about Nutanix. Not all that many years ago many companies went through a major IT overhaul by replacing big blue mainframes with smaller primarily UNIX boxes. This IT transformation was called “distributed computing.” I was one of several managers on such a project where I worked. Not well recognized at the time was that one set of problems related to centralized mainframe computing was being exchanged for another set of problems related to multiple application and data servers. In a nutshell, as the number of applications and the volume of data escalated, the number of servers required multiplied as well. What used to be the I/O bottleneck (and vendor lockin) of mainframes was traded for a nightmare of networking, capacity allocation and load balancing among myriad boxes. Enter Nutanix. In a nutshell, they vastly simplify the management of all those boxes, interconnections and capacity requirements. The management job is not eliminated, but with Nutanix it is no longer necessary to pay attention to every server and storage unit as an individual device. All the devices and traffic between them is hidden from view and the management is raised up to a macro level. And it’s not just the management, but forecasting and capacity planning are made much simpler as well. These important functions become more accurate and gain expanded time frame windows.
New Relic - APM/NPM are not new. I managed the TPNS group where I worked in the 80s (TPNS stands for Teleprocessing Network Simulator, an IBM product for the IMS DB/TP environment). Oracle has offered database performance monitoring tools for a number of years. But, the problem should be fairly obvious from what I’ve just related. The monitoring tools that have been available are all domain specific. What sets New Relic apart is that it monitors at higher level of abstraction. And as Saul noted they are in the process of adding NPM tools. I don’t have much to add other than watch this space. I don’t know much about it other than what’s been discussed here, but to some extent Elastic plays in the same field. That may pose a serious competitive challenge - or it may not. I don’t know enough about it yet to make a determination. Maybe there’s some folks here who can shed more light on it than I.
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“What does Nutanix do? Damned if I know.” Saul
As a fellow old fart, I appreciate your honest admission, Saul. The complex high tech nature of our exploding stocks preclude many of us who are in the golden years of our life.
However, there is hope for us old guys! There is a sprinkling of young extremely bright minds beginning to visit and post on Saul’s Investing Discussions. My son (Mr. TBS) is one of them. May their tribe increase!
The wisdom of decades of sober experience mixed with youthful fresh insights into our rapidly evolving high tech complex world will profitably benefit us all.
Jim
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Of course a marked correction or bear market will come eventually.They always do. And rising interest rates, tariffs, and trade wars do eventually stop market rises. Look, the next Bear Market may have started two weeks ago for all I know! But we never really know when. And what a price those people have paid by “keeping their powder dry” and staying out of this market for the past nine years, waiting for the big correction that never came.
I excerpted this from Saul’s post because think it bears repeating (emphasis different from original). Even if investors just keep a portion of their “powder dry” it is opportunity lost. Imagine how a 15% cash position would have grown in the last 9 years.
If people absorb this one lesson from the board their time will have been well spent. Don’t underestimate this very powerful concept.
Jeb
Explorer Supernaut
You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx
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Saul, thanks for continuing to provide monthly, sharing your wisdom and very watchful moderation of the board. Its been enormously helpful, to the tune of changing life for me (and i think many others on this board).
Just one point on your ZS description:
"They have 100-plus data centers all around the world, which would be almost impossible for a competitor to replicate. "
This was discussed on the board at some point.
It is my guess (based on the how ZS describes… and how i would think it ought to be based on their services) that ZS has not build dedicated data-centers around the world - they have simply leased capacity on public cloud (from providers like Amazon AWS and Microsoft Azure etc). They have leased such that they end up replicating their infrastructure on 100 (or more now) physically segregated data centers around the world. Purpose of doing this obviously is to avoid single point of failure… but more importantly to provide very low latency connection from anywhere in the world and also simultaneously satisfying customer (or local laws) that require physical location of their data / access within specific country.
This is by no means “easy” to do… however, they way they have done it is “much easier than building and operating their own datacenters around the world”. So it is also not “that difficult” for a capable competitor to replicate.
Ofcourse, this is not the major point in investment thesis… however, its useful to to understand one aspect of competitive moat.
Hope its useful.
nilvest
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Microsoft Azure, as I understand it, has more data centers around the world than Google and AWS do combined (someone may need to correct me on this, but that was given at a presentation). Microsoft has 52 or thereabouts. Thus Zscaler operates with more than double the data centers that even Azure offers worldwide.
It certainly is not impossible for a competitor to scale out to many data centers, MongoDB does it with their database automatically with their new provisioning functionality.
However, Zs has been doing this for 10 years, and in 10 years there has been no one else to do it, and to do so from scratch to catch up with Zs in a competitive fashion is near impossible at this point in time. You have to come at it from a different direction if you want to be competitive.
In the entire world there is one company that is somewhat similar, although they do use appliances as well (although the appliances are free and part of your subscription). That is iBoss. iBoss is in the visionary square, well behind everyone else other than in vision, and even at that they are behind Zscaler.
According to Gartner there are two other not well distributed possible all internet technologies that may or may not get some play, but I am not all clear if either of these really compete against Zscaler anyways.
So I agree 100 data centers in and of itself is not insurmountable, it is the entire product itself that appears to be insurmountable unless someone tries to come at it from a different angle. To date there is no competitor that qualifies. iBoss certainly likes to market itself as a better option than Zscaler (and they have some sales and VC money, but are way behind and growing well, but still slower than Zscaler). The other two technologies, one involves basically something similar to what Nutanix offers with its DaaS product actually, and that is basically streaming the desktop to the computer. Everything runs on the server and therefore the device on the edge never directly links to the internal network. However, it is not the same as DaaS.
But such technologies are nowhere affecting Zscaler’s business, so I have not dug deeper than a cursory examination (since Gartner mentioned them).
Tinker
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I excerpted this from Saul’s post because think it bears repeating (emphasis different from original). Even if investors just keep a portion of their “powder dry” it is opportunity lost. Imagine how a 15% cash position would have grown in the last 9 years.
A bit of a straw man argument. 9 Years ago was a great time to buy (buy-low); the idea is to sell high. The real question is how much opportunity will be lost keeping a cash position from now; given the market is reaching new highs (sell-high).
Everyone knows that a sell-low; buy-high strategy never works. Right?
tecmo
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The real question is how much opportunity will be lost keeping a cash position from now; given the market is reaching new highs (sell-high).
That’s interesting. So the argument is to sell when the market hits a new all-time high. Let’s see. Forty years ago, 1978, the S&P started the year at 90.25. Right now it’s at 2914.22. Just think how many thousands, yes probably thousands, of days the S&P has hit new all-time highs (even if only by a fraction of a point) on its voyage from 90.25 to 2914.22. And each time the commentators said “The S&P hit a new all-time high today…” but you would have been out of the market forty years ago when it hit its first new high. Sorry, but selling out because the market is at new all-time highs is not how one makes money in the market.
Saul
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can you tell us more about your confidence on NTNX? you said ‘only 3 stars’. Are you setting it up to reduce and to sell out like you did for SHOP?
what do you mean you ‘wanted to buy more in September’?
from the % it seems that you reduced NTNX a chunk.
Did you sell so much in August?
tj
Packed with great info as usual, but I found your thoughts on Pivotal very very informative:
“September. This month I sold out of Pivotal when it had a disappointing and confusing conference call. Many others said they did the same independently. It’s been discussed at great length so I won’t go into it, except to say that I sold out at about $22.00 and it’s now at $19.58, down 11% further. Just because it had already fallen quite a bit to $22 didn’t mean that it was a bargain. “
I’m trying to improve how I think about and handle these types of situations and the idea that it’s not a bargain just because it has fallen is critical. Probably one of the keys to your success Saul.
Great post this month and thanks for sharing.
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Forty years ago, 1978, the S&P started the year at 90.25. Right now it’s at 2914.22.
Another straw man argument. The point is to sell-high; buy-low. A seller in 1978 had lots of time to buy back into the market.
Sorry, but selling out because the market is at new all-time highs is not how one makes money in the market.
Actually a more optimal approach is to sell if the market has not reached a new high “recently”; a good measure of recently is 100 trading days or so.
Just to be clear.
Staying 100% invested all the time is better than staying 100% in cash all the time. However moving in and out of cash at “optimal” times is even better.
tecmo
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what do you mean you ‘wanted to buy more in September’?..from the % it seems that you reduced NTNX a chunk…Are you setting it up to reduce and to sell out like you did for SHOP?
Hi tj,
Well duh, did you forget that the price fell about 25% while the rest of my portfolio rose. Don’t you think that that reduced NTNX’s percent of the portfolio by “a chunk”?
What I wrote was:
I added a fair amount to my position during the month but a week ago I decided that I have enough and will wait and see what happens. I would have bought more but I had no available cash and I didn’t have any larger positions I wanted to trim, and I didn’t want to trim my smaller positions as I wanted to let them grow.
That was pretty clear that I added to my position in September, not reduced it. I sold out of Shopify because of surprise (to me) bad news (what I considered bad news, anyway). As I made clear in my description of Nutanix’s results, I thought they had great results. I think you’ve got my thoughts all wrong.
That never means I won’t change my mind about any stock in my portfolio during the next month, but I have no current intention of selling out of Nutanix. I added to it, but decided I had added enough because of (1) not having more cash to buy with, (2) having a large enough position in a beaten down stock (7.6%) so that a return to previous levels will give me enough of a boost to make me very happy and (3) I will add only so much to a position that is going down, especially if I don’t fully understand why. I’m not a guy who looks for cheaper entry points, I prefer to add on the way up.
Best,
Saul
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However moving in and out of cash at “optimal” times is even better.
In theory … the problem comes in practice, i.e., determining what is “optimal”. I have looked at a bunch of proposed signals and they work in some circumstances and not others. If they are too hair trigger, one is getting in and out all the time and missing big up days … there are some amazing figures about how missing big up days really blows one’s results. If they are slower, then they have the potential of not getting one out until much of the drop has already occurred and not getting back in until there is a lot of gain, resulting in a net loss over just holding.
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It would not be logical for the Miami Blue-Rinse Widows Investing Club to compare the stock part of their prudent portfolios to my ‘Less Work, Do Nothing’ comparator. For ridiculous and nonsensical types like me who like to see how it is getting on, the average of the ADBE, CRM and MSFT constituents is up 70% TTM. Now that’s what I call a bull market!
Many here are doing even better, wisely a fact the Miami Blue-Rinse Widows shrewdly judge to be of little interest to their necessarily more cautious style group. The S&P is their benchmark, and a good one it is too.
Tecmo, I don’t know how anyone could time the market well enough to move in and out of cash at “optimal” times.
Can you start a new OT thread and share your results over the past 5 or 10 years and share how you’ve figured out how to optimally time your buys and sells?
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Tecmo,
Wow! Genius insight. I’ve got a question though. Exactly what criteria do you use for determining optimal times? Seems like that’s kind of important part of your strategy.
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Tecmo, I don’t know how anyone could time the market well enough to move in and out of cash at “optimal” times.
I put the words “optimal” in quotes; clearly getting to 100% optimal is not a realistic goal; but even making slight improvements can have a big impact.
I am quite surprised about that the comments were so pessimistic. Many on this board have taken to the belief that you can beat the market by picking individual stocks; why not extend that to market timing? I would think that on the difficulty scale it is probably a lower bar than picking stocks.
tecmo
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Tecno, there are boards for discussing market timing. This is not one of them. This is completely off topic and please take the discussion elsewhere. Thanks for your cooperation.
Saul
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Sorry Saul, in this months results you mention that you bought and sold NVDA within a few days and bought and sold WIX within the month (in an earlier month).
Any feedback on what your buy and sell triggers were? If not trading signals, there must have been adverse news or large price movement to warrant selling as I thought you’re general strategy was buy and hold (until either investment case changes or perhaps valuation becomes way too unrealistic).