My impression of Tinker’s post is that one needs to determine why a market is not valuing a company the same way as one’s analysis before determining a company is undervalued.
The market may be wrong but it isn’t going to be flat out stupid. There are reasons a company is valued by the market and when it doesn’t rise with the rest of the tide it’s important to figure out why. As Tinker likes to call it, what’s causing the fear, uncertainty, and/or doubt (FUD)?
With SHOP, there was the perception of not being profitable, and disbelief that it could continue to grow.
With ANET, there was the risk of litigation.
With KITE, there was the risk of poor outcomes, FDA shenanigans, uncertainty over the market for such an expensive treatment.
Thinking you can just run numbers and decide a stock is significantly undervalued is risky, because those numbers are so easily available to analysts and computers. To confidently beat the market (especially with an ultra-concentrated portfolio) you want to be able to identify all the reasons why a company is undervalued and be sure those reasons are overblown.
The market has more eyes and ears than any one of us, or even the entire board collectively. It’s safer to assume that the market collectively has more information than any one of us. You want to know that the market is misinterpreting information, not just missing it. If you just assume that “the market is wrong” without identifying why it is wrong, you run the risk that your higher valuation is due to incomplete information.
there is no such thing as “overlooked” in the stock market. Do not fool yourself, there just is not. Agree . Which is why I have finally learned only to buy stocks that are actually going up in a bull market. It’s hubris to think you are the only one who have figured it out.
OTOH, the recognition of the value of a growth company , particularly a NPI type, follows a lazy S curve, similar to TALC curve. It is possible to get in before the masses.
you cannot beat Wall Street by using better financial analysis. again very true especially for NPI stocks. I call it the spread sheet dilemma because it requires way too many assumptions. These assumptions are about unknowable the future and a thus are mostly WAG. And small changes in in the compounding rate produce outsized differences in the end result
It’s safer to assume that the market collectively has more information than any one of us. You want to know that the market is misinterpreting information, not just missing it. If you just assume that “the market is wrong” without identifying why it is wrong, you run the risk that your higher valuation is due to incomplete information.
This is getting a little repetitive but there really isn’t any hand wringing about why NTNX trades at its present value…it is in the three items I already posted…you can go back historically to the moments that the stock has dropped since its early IPO and see what happened at that time.
The market is worried about competition (the HP acquisition), it is worried about what appears to be lack of recurring revenue, it is worried that it disappointed shortly after its IPO.
It is not necessarily cheap…it has a great deal to prove as has been previously mentioned specifically whether it can turn a massive land and grab strategy into a profitable software company.
There is fear…you are fearful, Tinker is fearful, probably most here are fearful…there is a huge jump in short interest on this stock as well.
IMO, nothing more can be known…either the company performs or it doesn’t and 2018 specifically will be the year of reckoning.
Its OK to be on sidelines if its not your cup of tea…no worries and there are so many other opportunities…no need to obsess over this one.
Nice post! I agree with almost everything you wrote except this premise:
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?
NTNX only went public last September so it couldn’t participate in the run up as a public company. As a private company NTNX created new value of $3B in 8 years. That seems like spectacular growth to me. It went IPO at $16 and it’s now around $22. Doesn’t seem to me that NTNX has been left behind the market at all. Sometimes companies briefly spike up shortly after the IPO. Happened with TWLO too. So if you are measuring the performance from the very brief spike post-IPO then I think you are being misled. What we should be doing instead is to look at what the value is compared to what we think it should be. I have argued that it should be higher than the current price even though it is 40% higher than the IPO price and the price from this past Spring.
you cannot beat Wall Street by using better financial analysis
There are times that you can. Example: LGIH this past Spring. I created a forecast model that showed that LGIH would almost certainly meet or beat their 2017 guidance. The market didn’t believe it and the market was wrong. Those who acted on our analysis profited nicely once the market realized what we calculated would be true.
going back a long time, Mostly the analysts thought the PC would be confined to business use. MSFT and INTC were moderately priced because the “market” thought there would be a PC in perhaps one out of a hundred homes. I thought a PC would be in one out of 10 homes. We were both wrong but my guess paid off. Mostly the analysts thought the PC would be confined to business use.
It was a guess because nobody in the early days could predict the exact rate of hardware improvement and equally important the rapid decline of software costs which made private ownership feasible.
Bringing it up to date, the same question exists about BEV and Tesla in particular. Opinions masquerading as facts get repeated over and over, including ones about how it is impossible to ramp up car production even though it is easy to find hard facts that Ford did it with both the model T and the Mustang. But no spreadsheet can tell you whether Tesla will come close to meeting it’s production goals or not.
It’s safer to assume that the market collectively has more information than any one of us true mostly. But in practice it is often hard to tell exactly what the market thinks, except when prices fluctuate in a narrow band indicating consensus.