NTNX: How to value the company

Investment Analysis Clubs Saul’s Investing Discussions
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NTNX is a fast growth tech company. Over the past 12 reported months its revenue was $846M based on its new accounting method. According to Bert’s article, NTNX is being valued like a storage company (2x is what Bert claims storage companies are typically value). I have some open questions about this:

  1. Why are storage companies valued at 2x TTM sales? Is it because they are growing slowly, it is because they have low gross margins, or is it because of some other reason?

  2. It would be useful to analyze a couple of storage companies that are currently valued at 2x. The analysis of their financials, their growth rate, their margins, etc should yield the reasons why they are valued at 2x of sales.

  3. The analysis in #2 above will provide us a basis to show how NTNX is different from these storage companies and give us reasons why NTNX should not be valued as a storage company. I suspect that we will be able to show why NTNX should be valued like a high tech software company which are valued at a higher multiple of sales (7-12x). This would give is a good idea for how much NTNX is mispriced (undervalued).

For now I will work on the second part of this analysis.

Of the $846M in TTM revenue, how much is software? Here is what was said at the investor conference last week (September 12th):

https://seekingalpha.com/article/4106356-nutanixs-ntnx-manag…

Question from analyst Sherri Scribner

Okay. That sounds very good. I know that you guys sell your solution on a commodity hardware stack, but the real secret sauce obviously for Nutanix is the software. What’s your mix of hardware sales versus software today and over time given your ability to sell software separately from hardware, how do you expect this mix to change and could you see the company being maybe 100% software seller some point in the future?

Here’s the answer from Sunil Potti

Yeah. I will start on that. It’s a great question. I think we probably, potentially done the sale, the service on this, because as you just heard, clearly, it’s 100% software company, that’s what we do…

And in the past we’ve given the statistics of bookings – percentage of bookings from software on a rolling four quarter basis, in last quarter that was 17%. But that – when we quote that software number, it simply a separate standalone SKU, but the fact is, today when we sell an appliance, our base operating system is bundled into that appliance. So we are selling a commodity appliance at 65% margin, almost if not all of that is because of the software…

So to put it in perspective, I think if you took our P&L and you said magically last year we sold no appliances and you say, you didn’t sale it a margin, you take the COGs out of the P&L and we can do that. We – the software is completely portable, Dell, Lenovo, IBM, HP, Cisco, SMC, customer choice again.

But if you ripped out those COGs, what would be remaining soon we built roughly a $1 billion last year which we did. If you took those COGs out, what would remain is about a $700 million or a $750 million software company, a pure software and support, going really rapidly, the leader in the space in $100 billion market. That’s what the company would be. So, I think, going forward, what you’ll see from the company specifically is more education and probably a somewhat quicker shift to software throughout FY18.

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:

https://docs.google.com/spreadsheets/d/1BM439p9c5y0FFq2JvYdr…


	        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%

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.

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Chris,

The best analog is Network Appliance (NTAP). They pioneered a new file structure for storage back at the turn of the century, their “secret sauce” was software running on their mostly commodity like appliances, and they were at one time one of the biggest things on Wall Street. Trust me. I made my first 10 bagger on NTAP.

The stock has returned to normal and not done much over the last decade. Take a look at their growth rate, at the cyclicality of the enterprise storage market, and the fact that although volume increases every year for storage, the price of storage tends to go down per unit by 30-40% per year. Even the giant EMC was bought out by DELL and not the reverse.

NTAP was not the “operating system” of the cloud however, as NTNX desires to be. But with the high competition, cyclicality of the business, and annual depreciation of price per unit, you end up with a lower multiple than other sectors.

VMWare is of course the most apt comparison. Perhaps run a historical analysis of VMWare.

Tinker

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The 96% revenue growth is the SW-only bookings growth that was quoted in the last earnings call. The SW revenue growth will be a bit lower than that. Probably somewhere between 68% (overall revenue growth) and 96%…my guess it’s actually somewhere in the 70s percent which is still higher than the other companies that I compared. Also, FWIW, SHOP has 81% margin on its subscription revenue and 36% margin on its merchant revenue.

Chris

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Hello Chris,

I did the same exercise (as far as adjusted revenues and Gross Margin) last night when the 10K was posted. My numbers came out different from yours related to Gross Margin. I saw that the support and other services amounted to $183858 of revenue and a GM thereon of 57.4%. When I gave the pure software revenue a GM of 90% (perhaps a little low) it resulted in a GM of 80.55% on the revenue after deducting for COGS of hardware.

I don’t believe the above “quibbling” has an impact on your undervaluation of NTNX today.

Thanks for your efforts here,

Best regards,

Mike

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Chris,

I will assume your 75% software / 25% hardware breakdown, but I need a full income statement, which I will take from here: http://ir.nutanix.com/company/press-releases/press-release-d…

Revenue they recognized for the TTM was 767M. If the software business is really 75% of the company, that means:

Software Revenue: 575M
Hardware Revenue: 192M

Cost of Revenue for the TTM was 327M, so if the software margin is really 90%…

Cost of Software Revenue: 57.5M
Cost of Hardware Revenue: 269.5M

So the hardware business lost a gross $77,500,000 for the year??? Before OpEx???

Surely your math must be off.

Another problem is that Nutanix’s operating loss dwarfs that of SHOP, TWLO, HUBS, and TLND.

For the TTM…

NTNX whole company
Rev: 767M
Cost of Revenue: 327M
OpEx: 866M
GAAP Operating Loss: -427M

or

NTNX software business at 75%
Rev: 575M
Cost of Revenue: 57.5M
OpEx: 866M * 75% = 649.5M
GAAP Operating Loss: -132M

NTNX hardware business at 25%
Rev: 192M
Cost of Revenue: 269.5M
OpEx: 866M * 25% = 216.5M
GAAP Operating Loss: -294M

compare to:

SHOP
Rev: 509M
Cost of Revenue: 229M
OpEx: 329M
GAAP Operating Loss: -49M

Yikes.

Bear

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Bear,

Revenue they recognized for the TTM was 767M.

Just a couple of quick points.

  1. I used the restated revenue of $846M. The difference here is less SW revenue is deferred and more is recognized at the time of transfer to the customer. I think it’s appropriate to use the new accounting method.

  2. There is also more deferred revenue which I think really should be considered. By comparison, SHOP has negligible deferred revenue. There is value to deferred revenue and it makes the income statement look not as good. I try to focus more on the statement of cashflows.

  3. I wonder if NTNX is paying their sales people on sales of hardware. I think that if they do they should not. Rather they should only pay commissions on revenue that has margin.

We must also remember that SHOP and NTNX have very different business models. SHOP’s new customers were mainly acquired through self-serve. SHOP is now just starting to invest in sales people to target enterprise customers. NTNX is focusing on enterprise customers and they are investing heavily in hiring sales people. They take 9 months to get up to speed and become productive so there is also a lag to when NTNX sees revenue generation from new sales people. And there is further lag until NTNX sees significant revenue form new customers (land and expand strategy). NTNX’s customer acquisition costs are much higher than SHOP. SHOP also has a lot of recurring revenue which requires almost no effort to keep getting. NTNX has to get repeat orders from existing customers which is harder and more expensive. SHOP is growing very fast and their revenue is really valuable (since it is recurring). This could explain by SHOP’s multiple is as high as it is.

NTNX is investing all cashflow into growing the revenue and the customer base. But if you look at the last few quarters you will see that the cash balance has been stable at around $350M. If they do better than expected then extra cash will all be used for growth. So we can’t expect to show P&L profits, non-GAAP let alone GAAP.

Chris

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I did the same exercise (as far as adjusted revenues and Gross Margin) last night when the 10K was posted. My numbers came out different from yours related to Gross Margin. I saw that the support and other services amounted to $183858 of revenue and a GM thereon of 57.4%. When I gave the pure software revenue a GM of 90% (perhaps a little low) it resulted in a GM of 80.55% on the revenue after deducting for COGS of hardware.

Thanks Mike. You’ve improved the analysis over my quick and dirty calculations. But I think that you’re right that if makes little difference in terms of actionable investment decision. Whether I think the shares are currently worth $46.50 or $35.50 does’t change how much I would invest.

With a NPS of 90 and demonstrated sales traction into the enterprise market I’m pretty excited about the prospects. Add the growth then you get a future value that’s even higher.

Chris

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We must also remember that SHOP and NTNX have very different business models. SHOP’s new customers were mainly acquired through self-serve. SHOP is now just starting to invest in sales people to target enterprise customers. NTNX is focusing on enterprise customers and they are investing heavily in hiring sales people. They take 9 months to get up to speed and become productive so there is also a lag to when NTNX sees revenue generation from new sales people. And there is further lag until NTNX sees significant revenue form new customers (land and expand strategy). NTNX’s customer acquisition costs are much higher than SHOP. SHOP also has a lot of recurring revenue which requires almost no effort to keep getting. NTNX has to get repeat orders from existing customers which is harder and more expensive. SHOP is growing very fast and their revenue is really valuable (since it is recurring). This could explain by SHOP’s multiple is as high as it is.

My point exactly. Probably best not to compare the two too directly. Same for HUBS, TWLO, etc.

Bear

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My point exactly. Probably best not to compare the two too directly. Same for HUBS, TWLO, etc.

Yes there are differences. I find it useful to compare them none the less. It provides me with a rough compass. These comparisons are not the end all be all and should be analyzed in more depth. In the case of NTNX, I’ve convince myself that it’s heavily undervalued. I could be wrong but it’s the investment that I chose to make.

Chris

PS: If you have a different or better way to value these companies I’d be interested to hear…

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If you have a different or better way to value these companies I’d be interested to hear…

I think it does make sense to do some back of the napkin math, I was just pointing out how I think your 75% software number goes awry.

As I’ve tried to communicate before, I don’t think it’s possible to reach a satisfactory range for intrinsic value on companies growing as rapidly as the ones we follow. All you can do is try to guess which ones will continue growing, have a good shot at profitability, etc.

I have concerns for NTNX:

  • Slowing Growth
  • Amount of OpEx
  • SBC at ~30% of Revenue (almost Splunk levels)

I’m sure there are many others, but these alone have tempered my would-be enthusiasm for this one.

Bear

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If you have a different or better way to value these companies I’d be interested to hear…

I think it does make sense to do some back of the napkin math, I was just pointing out how I think your 75% software number goes awry.

As I’ve tried to communicate before, I don’t think it’s possible to reach a satisfactory range for intrinsic value on companies growing as rapidly as the ones we follow. All you can do is take a look at several factors:

  • How fast revenue is growing, and whether it is slowing, accelerating, etc
  • Margins
  • How much the company spends, SBC, etc
  • Market cap (relative to revenue, etc)
  • How likely you think it is to keep growing at a certain pace, and for how long
  • If it has a good shot at profitability

I’m sure there are others.

I have concerns for NTNX:

  • Slowing Growth
  • Amount of OpEx
  • SBC at ~30% of Revenue (almost Splunk levels)

I’m sure there are many others, but these alone have tempered my would-be enthusiasm for this one.

My opinion is that it is for good reason that NTNX is valued at a smaller multiple of revenue than say, SHOP, HUBS, etc.

Bear

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NTNX is focusing on enterprise customers and they are investing heavily in hiring sales people
I prefer companies that address such a "broken process"that few salesmen are needed, companies sell themselves when they see peers and competitors using the product sucessfully

The Xerox machine was an example. I had a relative who was a Xerox sales person, his easy success led him to think he was the world’s best salesman. He found out he wasn’t when he quit to sell
something else.

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Solved that problem in 4 seconds with a Google search after wasting time at FedEx store and Home Depot. Convert PDF to TXT, all over the internet, but not at these copy shops. Oh well, moving on…

In re: Nutanix.

Nutanix is a recent IPO so the two rules I discuss below may be less applicable than with a stock of more age, but NTNX is past its lock up stage, and more likely than not will be applicable nonetheless.

In investing I have learned two rules:

Rule (1) in a bull market,inevitably you will start moving from higher quality companies to lower quality companies because the higher quality companies share prices create less apparent upside due to valuation, and sometimes because the growth slows down from what it was. So lo and behold, and it happens every time, you start looking for overlooked gems. Without realizing that there is no such thing as “overlooked” in the stock market. Do not fool yourself, there just is not.

This new stock you look at will be shiny, building a brilliant visionary future, it will be built on the back of rapid revenue growth, selling for less than the multiple it should be sellling for, and has a brilliant story. However, there is always a reason such a fine gem of a company has failed to rise with the higher quality companies in a bull market. That reason is not because it has been “overlooked”. That is a loser’s game generally speaking.

Rule (2): you cannot beat Wall Street by using better financial analysis. Do not even try. Rule of thumb is sufficient combined with cash flow analysis, and sometime sin the simple you can see things that the bean counters dismissed as it was too simple, but the more elaborate you get, the less and less likely that you know something more than Wall Street when it comes to the numbers. You just do not and that is a losers game generally speaking.

Now we have Nutanix. Clearly it has market momentum, and has built out a strategic and enviable position that distinguishes it from the usual also rans. This makes it a candidate for the rare exception to the above two rules, but only a candidate.

Why was it overlooked? Why is it not valued as it should be? Why did it not rise with the rest of the cream of the crop in the bull market?

If you can come up with qualitative reasons that are not readily apparent and simple for Wall Street to calculate on a slide rule, then you have a place to start and examine. Because as said above, you will not beat Wall Street with your slide rule, even with a better slide rule.

I have done more digging into Nutanix than any person on any board within the Fool community, I can almost guarantee it. More threads than even Duma can link to I suspect. And there is a lot, an awful lot to like about Nutanix. Without question.

However, what still gives me pause is how many times an issue with Nutanix is brought up and there is a quick rationalization to account for what could be a serious issue. Always an excuse. Sometimes the reasons are valid, but mostly we are trying to make the company into what we want it to be rather than what it is.

What it is, is a company that is probably valued at less than an acquirer would buy it for. Making it a lower risk possible high return stock. What it is, is also a company with an excellent product, with momentum going in to the fortune 2000, and with the land and grab strategy these new larger clients are likely to continue to buy more and increase growth.

However, what it is not is a company with any current way to print cash in the future. A company with switching costs that at this point appear to be somewhat lower than you would expect and therefore cannot raise prices in the future. A company that has no recurring revenue and must sell most of its product through extremely low margin appliances, appliances that we allocate a share of software vs. hardware to.

However, we have no idea what Nutanix charges for software to OEMs and customers. Do you think they ar paying 70% of the total product price on Nutanix software? Really? That would be interesting to know. Because that is the real value of the software component for each box that goes out.

I still have my hesitations in regard. I have owned too many companies like this, later in a bull market, that look so good, only to have them eventually whither when the market turns even slightly because in the end they had no ability to print money.

I bring this up because these rules are quite real and true. Nutanix fits them. On the other hand Nutanix also does not fit them, as Nutanix has real business that appears to be higher quality than the typical company of this ilk.

So why is it selling so “cheap”? Why is it “overlooked”? What FUD exists so we can be confident, that despite the bull market, Wall Street has really got this company wrong?

Tinker

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Hello Bear,

  • SBC at ~30% of Revenue (almost Splunk levels)

I agree that is a legitimate concern. My hope is that 30% is explained by the company’s first
year of operation following its IPO, and that SBC will significantly moderate in the future.

Best regards,

Mike

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Why was it overlooked? Why is it not valued as it should be? Why did it not rise with the rest of the cream of the crop in the bull market?

Seems like we have already been through this a few times. The reasons are these:

  1. They disappointed very early after IPO…investors questioned their foothold on the hyperconvergence market

  2. HP bought a lesser competitor…investors questioned their foothold on the hyperconvergence market

  3. Many are unhappy about what seems to be a lack of recurring revenue

These are the three issues that explain why the stock hasn’t skyrocketed.

However, what still gives me pause is how many times an issue with Nutanix is brought up and there is a quick rationalization to account for what could be a serious issue. Always an excuse.

I think you need to explain this because I haven’t seen anyone provide any quick excuses or rationalization. The issues have been ferreted out…nothing more.

You cannot get comfortable with NTNX and that is OK…they are a very recent IPO…and they most certainly need to prove themselves…and demonstrating consistent revenue growth and transition to a pure software model is still very much in question.

As you well know Tinker…money can be made in stocks at many different points of entry…no one is missing out quite yet by not being invested and there is always time to get in when the comfort level suggests so.

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These are the three issues that explain why the stock hasn’t skyrocketed.

Well, they are three concerns, to be sure, but I think there are others. The core one may be that those who are enthusiastic about the company quote large potential market sizes and make assumptions about NTNX taking a large percentage of that market. Myself, this seems simplistic. I suggest that the “market” here is actually a number of different needs that may or may not align.

E.g., a contrast has been made between all on prem solutions vs those which include cloud and I think there is an assumption that everything will include cloud going forward. But, in fact, there are some very good reasons for cloud and on prem separations … not the least of which being for security. I think it quite possible that many companies will run some applications, customer facing ones, on cloud platforms, and other applications, company internal applications, on on prem systems, if for no other reason than security and simplicity. A more globally distributed company may choose to put internal applications in the cloud, but there is still a good argument for making them a different silo … no convergence.

Plus, as I have noted elsewhere, we are early in this convergence game and the accountants are enthusiastic about the savings of mushing together the computing resources such that any one computer is more fully utilized, thus saving the company money for the number of systems they have to support. But, it turns out that there are some important classes of applications, notably high transaction volume data base applications … say like the core financial and ERP applications which are the backbone of the company’s operations … which do not play well with friends. That doesn’t keep the accountants from trying to shove them onto converged systems, but the result is often bad news in the end and there is always the possibility that people will learn … could be a long shot, but it could happen.

And, of course, there is the assumption that NTNX has the magic sauce that is going to take large chunks of the TAM. But, right now there is a lot of competition, some of which has its own good story in a different way and we don’t really know much about the decomposition of the needs of that overall TAM and the strengths and weaknesses of the various competitors. In the technical forums where I participate, VMWare gets mentioned a lot, along with some hardware specific solutions, but I have never heard anyone mention NTNX. And these are forums with people with thousands and tens of thousands of users and up to hundreds of terabytes of databases, so not limited to small systems by any means, but they are database applications … the backbone of many companies.

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There seems to be an underlying background assumption in this discussion that the market is always wise, and if Nutanix hasn’t risen yet there must be a good reason, and it’s our job to find it, and prove that the market is correct.

Let’s see:

I bought Shopify for the first time on Mar 28, 2016 at $27.25. It closed yesterday (less than a year and a half later) at about $123.00. Yep, the market really nailed that one!

On that same day, Arista was at $59. It closed yesterday at $182. Nailed another one.

Not to even mention Kite, which almost quadrupled in less than a year.

And you can go down the list…

My point is simply that the market doesn’t always get it right. Not even close!!! If it did, I wouldn’t be up 63% in less than nine months so far this year.

Doesn’t mean that Nutanix will rise like Shopify, not at all, but you can’t just say smugly that the market knows what it’s doing and we should defer to its decision.

Saul

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Doesn’t mean that Nutanix will rise like Shopify, not at all, but you can’t just say smugly that the market knows what it’s doing and we should defer to its decision.

Yes, if the market was always right then the market would be efficient and no excess returns would be possible. If that were true then Saul would not be able to consistently (on average) beat the market.

Here’s an example:

https://seekingalpha.com/news/3296587-arista-networks-plus-2…

Arista Networks (NYSE:ANET) is up 2% as Morgan Stanley eats its “humble pie,” lifting the stock back up to Overweight after seeing shares nearly double since it went to Equal Weight nine months ago.

The firm’s compensating by naming a Street-high price target (boosted to $210 from $125, implying 13.4% upside from today’s higher price) and now expects at least $8 in earnings power run-rate.

So does someone just because they are an analyst at Morgan Stanley have a better slide rule? Are they better at figuring out how the qualitative factors in the specific target markets will unfold over time? Not necessarily. What will happen with NTNX? Is it as undervalued as I suggested yesterday? Maybe, maybe not. But to assume that professional analysts are better and that we should go home and not even try means we can never take advantage of gains that we can make from our own analysis.

Chris

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My point is simply that the market doesn’t always get it right. Not even close!!! If it did, I wouldn’t be up 63% in less than nine months so far this year.

Without a single doubt that is correct Saul…otherwise there wouldn’t be a market. The market is rarely correct IMO.

I think Tinker may have been referring to how he views momentum investing because otherwise, it makes no sense at all.

Also, a poster implied that NTNX is a great unknown in the hyperconvergence realm…simply not true…they are well respected by their customers and the competition.

Even VMware at one of their tech conferences had their employees wear t-shirts that tried to dig at NTNX…GOOG wants NTNX (a previous VMware CEO)…and their customer list is pretty impressive from many industry lines:

https://www.nutanix.com/

Scroll to the bottom and see the NASDAQ among so many other great companies.

A great “unknown company” growing revenue that fast and already at a $1 Billion run rate???..the industry knows this company very well.

The stock will move based on NTNX’s ability to pull off its strategy of land/grab and conversion to pure software and consistent revenue growth. The TAM is there according to independent sources…but as we can see from those three items I mentioned…it is unlikely to be smooth sailing. There are risks.

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Saul, Chris, I think you are missing the point I was making. It is not that the market gets everything right, of course it does not. But there is always a reason for why it gets it wrong. Usually a FUD related event, or a financial panic, or some such thing.

What I was discussing, is in a bull market, when stocks are rising, and the market is trying to find something “cheap” enough to that has not already risen because all the best companies have already, why is it that a company like Nutanix has not gone up with everybody else?

The second point is, is that, as you mention SHOP and KITE. SHOP was still considered “overvalued” way back when. I know it was when I bought it. There was still a degree of fear. SHOP had fallen with the rest of the SaaS companies for some reason in early 2016. It was an entire sector thing.

KITE was always a fearful purchase.

With Nutanix, you have a stock that (1) had not risen in a strong secular bull market, and (2) that is literally considered cheap. Nutanix is not some unknown company that nobody knows about. It is well known. So why is it both cheap and falling way behind the market?

To further the point, there is no fear with Nutanix. We don’t believe there is much risk buying it here. And frankly, neither do I. It seems to be a low risk, potential high return.

But it is not that the market has it wrong, it is that the market has not done to Nutanix, what it has done to practically all other high growth disruptive companies, and that is make it “overvalued” and made it appreciate substantially.

My original point was, and it is still true, that as a bull market moves on, after the best copies seem to expensive or have exhausted much of their upward trajectory for awhile, we always find some “undiscovered” gem that the market just overlooked. It will be unprofitable (usually very unprofitable), it will have a great story, demonstrate rapid growth, and be visionary in nature, and it will leave us feeling that there is little risk because it is so “cheap” relative to its market position and growth rate.

That is the context of my comments. And as I said, Nutanix may be the exception to this rule as there is much more meat on Nutanix’s bones than you see on most every other company of this ilk. And this ilk of company almost always turns into a long-term loss. I don’t see that with Nutanix. But nevertheless, there is a reason why Nutanix has not done what every other high growth, disruptive, market leading company has done in this market.

That reason can simply be it is a recent IPO, lock-up just expired a few months ago, and it is still not trading like a usual stock.

It could be, like this story https://awsinsider.net/articles/2017/07/10/cloud-security.as…. Don’t take the study too seriously as it is put out by Barracuda and they are a high growth company that does cloud security. But they have a follow up study that shows that enterprise computing is now 40% public cloud, and is expected to be 80% public cloud by 2020 (or 22) and the only thing holding it back are security issues (that remaining 20% will be the most crucial information that will be secured on premises).

But this story alone shows a good chunk of enterprise computing moving to the cloud. Great for Nutanix, right?

Not if Nutanix is paid on a per CPU basis, as it is now. The public cloud companies do not use Nutanix in their giant servers, and thus as enterprises buy fewer equipment for on-premise, even if Nutanix is one of the leading vendors to spearhead this hybrid cloud model. Nutanix will have much less market to proliferate in, if a material chunk of the enterprise computing demand continues to move to the public clouds.

I am not saying that is what is going to happen, but that is another fundamental issue.

A further issue is that there is fierce competition. If enterprises are going cloud and forsaken their legacy infrastructure, then much of this competition from EMC to Cisco to Network Appliance will fade away, but if not, competition is only going to heat up.

Multiple issues that could be the reason for this. And if these reasons are fundamentally flawed, then by all means Nutanix will be that exception to the rule, because these FUD issues will be proven false and over time the market will cause it to rise.

Thus not saying the market always gets it right. Clearly that is not the way I invest or perceive things. What I am saying is that the market is not stupid, and when you find a cheap gem of a company that has trailed the market, and appears to have done so with no real FUD issues to explain it, then it is usually an error to say the reason for it is that the “market just misunderstands the company.” That will not be the case.

That type of thinking is you thinking you are smarter than the market, vs. what we can do, is better perceive FUD events, better take advantage of panics, and better at taking the long-term view. But we are not smarter than the market when such things are not in place.

That is my point. And again I say Nutanix may be the exception to the rule. Obviously I like it or I would not have invested so much time into analyzing it. I DO recommend holding it in a diversified portfolio. However, I worry much when something seems too good to be true and there is no FEAR involved in the taking advantage of it.

Tinker

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