NTNX P/S

why is NTNX P/S (~5) low compared to the other SaaS?

could they be fairly or under valued!?

tj

Hi tj,

I think analysts look at Nutanix as a not-pure SaaS company, but as a hardware-software hybrid. With recently rising DRAM it hurts their margins. To be honest I’m only just a recent buyer after following a few weeks, reading earnings transcripts and so forth. Bert has an article that might address your question:
https://seekingalpha.com/article/4104089-nutanix-puzzling-pr…

John

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Hi John:

I know Arista but not so much Nutanix.

Arista is mainly selling software and it is seen as such by the market but it also sell the hardware (they use white box). Is that why ANET P/S is 11 while Nutanix is ~5? is that due only to perception or is there more to it?
How could ANET and NTNX be compared?

I understand Arista is an innovator. Can someone here expand a bit more about how Nutanix is a leading innovator as suggested in that Bert’s article?

tj

ANET and NTNX are completely different from a business perspective in that ANET obviously is dominating in a much more domineering manner, in which it barely has to spend on marketing (<10% of revenues), can invest 25% of revs in r&D, and still have operating margins of 30-35% that equal those of Intel, Cisco, Nvidia, and the rare truly super competitive companies.

Nutanix spends more than 100% of its gross profits on marketing. It sells its hardware appliance for between 0-10% gross margin (vs. ANET that gets a very large profit off selling its hardware), and Nutanix is one of two companies in its market that dominates the market. The other is VMWare, and depending not he study, it is unclear if Nutanix is still the market leader, or if VMWare has over taken them.

The issue with VMWare is that they are losing and not gaining marketshare to VMWare, although both VMWare and Nutanix are likely to run away with the market in the end. But the market does not like all the competitors out there such as NTAP, Cisco, HP, nor how VMWare has been able to at least equal Nutanix in marketshare.

As for partners, VMWare also has Amazon’s AWS, which is by far the largest cloud provider, MSFT has its own stack (but Nutanix is still used to work with Microsoft’s Asure along with AWS), and Nutanix is partners with the #3 and #4 clouds of IBM and Google (albeit, not really partners with IBM cloud at the moment, but is selling its software on IBM power servers).

The momentum seems to be with VMWare in this regard.

As for price to sale, it is misleading, as Nutanix gets ~$0.00 from the sale of the hardware that it puts its software on (which is 83% of their sales - the rest is software only or support). If you take out the 30-35% of revenues that are derived from the hardware, the price to sale is more like 6 or 7x, thus it cannot be said that NTNX is dreadfully undervalued.

In addition, there are concerns about where the super hyper converged market is going (that Nutanix is the pioneer in), and thus some uncertainty there as well (compared to ANET, and we know where its market is going with switches and routers and software - with some concern on white boxes).

Plus unlike ANET that is extremely profitable, NTXN is years from profitability, and when it is, it will have much smaller margins that ANET does.

Thus the disparity between the two.

What NTNX’s product does is centralize, commoditize, and dramatically increase the efficiency of enterprise data centers, along with providing seamless integration between cloud and enterprise data centers. In a sentence it makes managing a enterprise data center not much different from running an iPad or a Windows laptop, and the goal is to turn enterprise data centers into basically a utility that is invisible to the operator, because its operation is that simple.

Tinker

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ANET and NTNX are completely different from a business perspective in that ANET obviously is dominating in a much more domineering manner, in which it barely has to spend on marketing (<10% of revenues), can invest 25% of revs in r&D, and still have operating margins of 30-35% that equal those of Intel, Cisco, Nvidia, and the rare truly super competitive companies.

Nutanix spends more than 100% of its gross profits on marketing. It sells its hardware appliance for between 0-10% gross margin (vs. ANET that gets a very large profit off selling its hardware), and Nutanix is one of two companies in its market that dominates the market. The other is VMWare, and depending not he study, it is unclear if Nutanix is still the market leader, or if VMWare has over taken them.

Hi Tinker, I’ve had a position in Arista for a long time now, and took a position in Nutanix six and a half weeks ago. I know it’s very short term thinking, but in those last six and a half weeks that I’ve had both them, Arista has risen 7.0% and Nutanix is up 19.5%. From what you wrote (above), I would have expected to have seen the reverse. (My position in Arista is bigger by the way).

Best,

Saul

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Saul,

No doubt that NTNX has outperformed. I believe it has outperformed NVDA and certainly outperformed SHOP. NTNX has the potential to outperform a lot of things going forward. We had some very detailed conversations about it on New Paradigm, which includes our deriving the fact that NTNX makes 0% margin on its hardware sales, thus the revenues from the hardware is equivalent to 0 revenues for valuation purposes.

Dumaflotchie has bought into it. I have pulled the trigger a few times, and then just said no, as I am trying to de-stress my life. Longer-term, risk-reward I like a few others better (and have to concern myself with tax issues thus limiting what I can do in my non-deferred side of the port), but I believe NTNX may be an excellent long-term investment. It is clearly the pioneer in this industry, and is either #1 or #2 in this very large and growing industry that is transformative to enterprise data centers, and there is not likely to be a #3 (but that is to be determined, but time is running out for a #3 to far its head and gain momentum).

NTNX is an amazing company. In 7 years it has gone from nothing to in mover than 25% of Fortune 2000 companies. From nothing to what will probably be $1 billion in sales in the coming 12 months (albeit, taking out hardware sales at 0% margin, more like $600-$700 million in product revenues).

Concerning to me is some “tricks of hand” that Nutanix is doing, not out of business strategy per se, but sudden changes intact from their strategy and accounting methodologies (excluding the new accounting measures, no problem with that) which is trying to raise its multiple in the stock market as a "software’ company and not a hardware company.

I do not think the market is that stupid, because as you look at its multiple, it is valued appropriately on both hardware and software multiples when you adjust the multiple. But this sudden change of strategy was kind of odd.

Just 3 months ago or so NTNX had the long-term goal 33% of its business as software only sales, and the CEO/founder was talking not more than a few weeks ago that its appliances are here for the foreseeable future because customers demand it as a means to deliver their software. They want the whole product, appliance and all.

Now, all of a sudden, they are talking being a software only company…like where did that come from all of a sudden?!?

But just some nit picking. I prefer companies like ANET or SHOP or NVDA that show what they have through business momentum and long-term business plans and not pivoting to create a different impression to the stock market. But I am sure I am being overly concerned about this issue.

NTNX is a fine company, pioneering company, market leading company, amazing company, also a funny company such as spending more than 100% of gross margins on marketing/sales. I do not know if I have ever seen that. But it has plenty of cash and its cash burn is not horrible.

Tinker

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a funny company such as spending more than 100% of gross margins on marketing/sales. I do not know if I have ever seen that.

Look no further than Hortonworks. In 2015, their S&M spend was double their gross profit. In 2017 through June the S&M spend was (happily?) only 25% higher than gross profit.

Bear
long Hortonworks

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“…Nutanix spends more than 100% of its gross profits on marketing. It sells its hardware appliance for between 0-10% gross margin (vs. ANET that gets a very large profit off selling its hardware), and Nutanix is one of two companies in its market that dominates the market.”

I checked the GM of Nutanix has been 57% TTM. So is that the software part makes that GM significantly higher? what is the hardware appliance share of the total revenue? But yes indeed they have a negative operating margin.

tj

NTNX is a fine company, pioneering company, market leading company, amazing company

I actively work in software R&D, spent the last 10 minutes on the Nutanix site, and still can’t tell exactly what they do.

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Yep me too. We heavily use AWS, so I probably have a chunk of knowledge in this area, but I have no idea what Nutanix does either. As Head of Tech, I guess I would be the customer?

I suspect they might help with the “devil in the details” of dealing with AWS. You need some pretty specialised knowledge, and making the most AWS resources (expensive) is very difficult, but you’re signing up for a rare skillset in Nutanix.

However, as a cynic in these matters, a lot of this sort of enterprise software decision making either happens because a) sales talked to the right person on the right golf-course, or b) because some tech person had used it previously.

Its a hard one to call, given the push towards cloud adoption, and away from hypervisor level provision.

cheers
Greg

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My wife was a technology director at a small school. She used CDW a lot. We will be listening to the confrence call at the end of the
month.

From there we will investigate further.

Old school? Yeah.

Cheers
Qazulight

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I suspect they might help with the “devil in the details” of dealing with AWS. You need some pretty specialised knowledge, and making the most AWS resources (expensive) is very difficult, but you’re signing up for a rare skillset in Nutanix.

I wasn’t entirely pleading ignorance, either! I understand all the terms, I’ve worked directly with various types of hypervisors, cloud platforms, and most common cloud providers.

A lot of what they offer sounds like a very, very heavily marketing and jargon heavy version of vCenter + vMotion, Mesos DC/OS, or Rightscale. Their Acropolis/AHV product seems like repackage of KVM, which is free. It looks like they had a nice vSAN-like product, but probably had to broaden focus to be defensive against comptetition from VMWare post-Dell? I haven’t followed them previously. It has all the feel that Gartner and Forrester are telling them that “hyperconverged infrastructure” is the next big thing, and they’re trying to repeat it as often on their corporate site as possible.

Several companies are vying for the “manage all your physical and cloud compute resources for you” space and I think all will fail, ultimately. There was a company that tried to offer a cloud platform for internal use that was compatible with AWS, but ultimately it was impossible to keep up maintaining compatibility. In this case it’s magnified, cloud providers have no incentive to play ball and the underlying tech is moving rapidly. The technology that stands the best case is Kubernetes (free software, originally from Google), and I’m not sure I’d bet on them, either.

I remain curious what people see in some of the tech stocks mentioned here, I confess. I was hoping someone had a reason for investing in them on a technical basis (not charts) vs run rate and would be willing to share.

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I remain curious what people see in some of the tech stocks mentioned here, I confess. I was hoping someone had a reason for investing in them on a technical basis (not charts) vs run rate and would be willing to share.

In my experience from an investor perspective, rarely does an industry insider offer advantages to investments…whether a doctor talking about biotech, an engineer talking about routers and so on. They can glean some insights for sure but many times they are paralyzed by analysis…ISRG was a great example…how many doctors said that it was a worthless and expensive technology???

Not to direct this specific to you but I have found over the many years that the technical stuff is only variably helpful with investments in technology. I do think that Denny said it best and maybe should copyright this sentence because it brings clarity in its simplicity and actionability:

“We cannot know what we cannot know…so follow the money”.

In the case of NTNX, I would have no idea if their technology is far superior than VMWare (its main competitor that is in bed with AWS). I understand the premise behind the investment and why on-pre and off-prem cloud hyperconvergence is necessary and expanding. I am not so sure that the cloud alone wins in the final lap because of data access lag, so IMO, hyperconvergence may just be here to stay.

But in the spirit of Denny’s now copywrited statement above, what can we say about NTNX? Please allow me to summarize through our prior discussions on the NPI here:

http://s21.q4cdn.com/380967694/files/doc_presentations/Q4201…
http://discussion.fool.com/nutanix-earnings-thursday-32821530.as…
http://discussion.fool.com/nutanix-end-game-32838752.aspx?sort=w…
http://discussion.fool.com/nutanix39s-ntnx-management-at-deutsch…
http://discussion.fool.com/scaleability-of-ntnx-32838447.aspx?so…
http://discussion.fool.com/nutanix-end-game-32838752.aspx?sort=w…

And Chris here at Saul’s board had a very nice post:

http://discussion.fool.com/ntnx-fast-grower-and-a-bargain-price-…

So what can we know:

  1. They have an incredible revenue growth YoY
  2. They have an amazing “lands and grab” strategy that often generates 3.6 to 23.6 times the original purchase…customers come back for more!
  3. The TAM is large enough that this doesn’t need to be a “winner take all” strategy…1/3-1/2 of the TAM would be enormous gains in stock price.
  4. Even their competitors like DELL, still had to use NTNX to attract customers
  5. They have moved into and beyond a $1 BIllion Revenue run rate…their product must be worth something with that magnitude of sales.
  6. They are hardware agnostic
  7. GOOG has partnered with NTNX - interesting development in light of the previous GOOG’s decision maker in this regard was the prior CEO of VMWare. BTW, NTNX does work with Kubernetes as I recall…part of the attraction to GOOG perhaps…see here:

https://www.blog.google/topics/google-cloud/nutanix-and-goog…

  1. They substantially reduce costs for their customers on previous legacy systems…likely explains the impressive land a grab.

I am sure there is much more technical jargon if you are interested…there are a few blogs of IT folks discussing implementation, etc.

All this said…”we cannot know what we do not know”…so could be a disaster after all is said and done. But what of the 8 points above suggests that this is the case?

And as a disclaimer AJM, there are a few negative issues surrounding and investment in NTNX and they are ferreted out in detail in those links…at the NPI, we have drilled and drilled to find weakness, competing moats, buyers power, substitution threats, etc.

And another disclosure regarding Denny’s copywrited statement…he is not invested in NTNX as far as I know.

It would be very satisfying if you would review this material and let me know all the negatives you can think of against the investment thesis either from an investor perspective or from a NTNX customer perspective.

Thanks in advance!
Duma

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“rarely does an industry insider offer advantages to investments”. A very good point :slight_smile:

My own experience is public cloud, AWS in particular, and more cutting edge architecture (software startups). After reading more about what Nutanix do, I think I get it. My “for dummies” (ie me) summary:

  1. Lots of companies have on-site/private computer servers and storage.
  2. Often, this infrastructure is not particularly flexible. Adding in another server to cope with seasonal load (for example), means getting a box shipped to your data centre and having some person plug it in and provision it.
  3. Nutanix provide software that wraps private infrastructure, and makes it flexible and allows better utilisation of existing resources. It can also wrap public cloud.
  4. Companies get better utilisation of their existing hardware, as well as visibility of any public cloud services (AWS, GCE, Azure etc) through a common interface (the OS).

Summmary: Nutanix sells packages that make your existing private IT infrastructure look like a public cloud in terms of provisioning and utilisation.

If my understanding of the company is correct, for every company that has a significant IT infrastructure spend, Nutanix or something like it would be pretty compelling. You seem to have 4 choices as a CIO

  1. Status quo (individual provisioning, run your own datacenter, low resource utilisation, high op-ex)
  2. Move to public cloud while maintaining current infrastructure (if possible, security, data etc)
  3. Roll-your-own, eg, virtualise yourself, or move everything to containers, kubernetes etc. (high up-front cost, high possibility of failure)
  4. Nutanix or equivalent.

A couple of things remain unclear to me:

  1. What exactly is the TAM? Is it the proportion of $100b that enterprises would save by using Nutanix to get better use out of existing resource?
  2. Do they do anything in the storage space (other than virtualisation of existing resource)?
  3. How is that $100b changing as companies move to public cloud?

Interesting discussion, thanks :slight_smile:

cheers
Greg

Throwaway comment: Nutanix reminds me of Sun Microsystems (when it was around). Selling servers with the solaris operating system, and then licensing and services on top of that. Which came tumbling down once Linux became ubiquitous.

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Hey Greg! Thanks for chiming in.

A couple of things remain unclear to me:
1. What exactly is the TAM? Is it the proportion of $100b that enterprises would save by using Nutanix to get better use out of existing resource?
2. Do they do anything in the storage space (other than virtualisation of existing resource)?
3. How is that $100b changing as companies move to public cloud?

We ferreted out this $100 Billion TAM quite a bit on those threads as we tried to “trust but verify” the number and how it was derived. They used that TAM in their initial IPO filings and we concluded that it had included a hardware component that we deduced was irrelevant to the company’s success since they are hardware agnostic.

https://seekingalpha.com/article/4098579-nutanix-revisited-d…

According to its S-1, Nutanix operates in several markets that IDC estimates to have combined annual spend over $100bn, of which $50bn comprises of server equipment, $45bn comprises of storage systems, and $5bn in virtualization infrastructure.

We did see independent market projections of $13 Billion by 2022:

http://www.marketsandmarkets.com/PressReleases/hyper-converg…

VMWare and NTNX are approaching the issue slightly different with NTNX designing a software centric model. Keep in mind that VMWare is already popular in companies that have pure on-prem IT…not what NTNX does…so they will have a larger “legacy” customer base.

The investment thesis would be that “if” NTNX can stay in top 2 (VMWare and NTNX), then it might be able to garner $6-7 Billion annual revenue by 2022…that would be a 6-7 multiple from here.

It does not appear that this needs to be a “winner take all” market for NTNX to do well over next 4 years.

There are risks and negatives to this investment also Greg not the least of which is the very high SBC right now and that they are transforming the company away from hardware to a software centric model that would have better margins and faster track to profitability…but along that journey…could be some hiccups.

There has also been concern about the dearth of recurring revenue (they addressed this against their land and grab strategy that actually generates more follow-on revenue) but as they transition to more software, recurring revenue should increase along with margins.

They have also partnered with GOOG recently for cloud:

https://www.blog.google/topics/google-cloud/nutanix-and-goog…

Enabling Nutanix Enterprise Cloud OS support for hybrid Kubernetes environments running Google Container Engine in the cloud and a Kubernetes cluster on Nutanix on-premises. Through this, customers will be able to deploy portable application blueprints that target both an on-premises Nutanix footprint as well as GCP.

IMO, this will likely be a tight association because of above but also since AWS went with VMware and Microsoft is with their Azule product…for GOOG, NTNX was a seemingly obvious choice. However from a size of cloud perspective…AWS dwarfs GOOG that is probably 4th or so in size. SO will this partnership really yield substantial gains for NTNX…not entirely clear.

Anyway…thanks for adding to the discussion.

Best:
Duma

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