I first learned about NTNX from Saul last September. Saul had heard about it from Bert I think and asked me if I would like to analyze it. After looking at it closely, I purchased a substantial position and posted two posts to this board. The posts are here and I think they are still worth reading:
Here is what I wrote back then:
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:
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%
[Figures in above table are from 9/2017]
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.
Fast forward to today. The stock is now at around $54. So one might ask is NTNX now fully valued, is it time to sell, or is there much more growth ahead?
NTNX just made public a new investor presentation. It can be found on on SA at…
If you are investor or considering to be one then this presentation is definitely a must look.
Here’s what I think now. NTNX is no longer valued as a hardware company. It’s EV/Sales multiple is now up to 8.2 up from 4.8 in September. I think it’s still a bit too low but not that different from the other faster growing SaaS companies that we can choose from. Also, perhaps we should look at EV/Bookings which would give NTNX a slightly lower multiple of 7.4. If you look at a more mature giant SaaS like Salesforce (CRM), you can see that the EV/Sales multiple is 8.4. This means that we might expect NTNX’s multiple to be maintained as it gets bigger. I would argue that NTNX deserves a higher multiple than CRM because it is growing faster.
Now if you review the new investor presentation, then you will see they have outlined a plan to grow revenue to $3B by 2021 so around 3 years from now. I think the plan is very credible and the outcome is likely. I would think that they will probably even outdo their own targets. Why?
The NPI is 90 which is the highest I’ve ever seen. This means customers are delighted by NTNX and are recommending it to others. This means their customers will not only not leave but will spend more: land and expand is working.
Their historical data and trending analysis shows that they are on track.
I just loved slide number 58! Their last earnings report was absolutely amazing, but this slide is saying that they don’t have enough sales and marketing people to win all the business that was available to them in the first half of 2018. They are spending and growing as fast as they can and once they fully staff sales and market they will reach their sales potential. They expect $509M in billings in the first half of 2018 but they think they could get $689M if they were fully staffed. Lots of growth is coming.
Slides 52-57 show their Rule of 40 analysis and approach. It’s compelling and it makes sense to me.
The shift from pass-thorough hardware to software business model won’t be complete until later this year so many of the financials will continue to improve.
OK, let’s assume that they hit their $3B revenue number in 2021 and they maintain their current EV/Sales multiple. This means that the stock is about a triple in 3 years or 45% annualized. Now if the multiple can expand (likely, I think) and/or if they beat their $3B goal (very likely, I think) then we could see a 300% increase or 4x the current stock price in 3 years. And remember that they are only scratching the surface of their total addressable market (see slide 69).
I added to my large position after seeing the new investor presentation and doing this analysis.