In my July portfolio summary, I said my expectations for Nutanix’s upcoming quarter were high, but I certainly didn’t expect the extra pieces of positive news that came out alongside earnings on Thursday afternoon, which boosted the stock by about +29% on Friday.
So three pieces of news came out, all unexpectedly after the market closed on Thursday
Earnings was actually scheduled for next Tuesday Sept 1st. On the call, they said they moved it up to a surprise announcement on Thursday afternoon because there was so much additional news that they couldn’t wait to share with shareholders. However, they obviously knew of the news in advance of scheduling the original date, so I’m guessing they were afraid that some of the information would leak and felt they needed to get it out there before the weekend. There was an article on Benzinga on Wednesday about unusually bullish options activity for Nutanix, so all of this probably contributed to them wanting to get the news out as soon as they could.
Long story short with earnings, their transition to subscription continues to move ahead faster than they ever expected. Although the revenue growth rate still shows a single digit growth, the subscription bookings, which are nearly 90% of revenue, and importantly, their subscription bookings continue to be almost all new first-time subscription bookings, so they still haven’t reached the point where subscriptions start to renew, which will make those future subscription renewal revenues very low cost revenue, whereas only the additional new customer bookings will be the higher cost variety once the current ones start to renew in future years.
Nutanix was cash flow positive for the first time that I can remember this quarter, which is likely one of the things that boosted the stock, as some people were worried about their cash burn and the need to raise cash (more on that below, which further mitigates the cash burn risk)
Nutanix’s revenue is still much higher than many of the companies we follow here, and it is very high margin revenue, and their net retention rate is high. In my opinion, the valuation is still incredibly low and I expect that multiple expansion is going to be significant over the next year, even after Friday’s gains.
If you subscribe to Bert’s ticker target, he does a better job than I could of analyzing the quarter’s results so I highly encourage those of you with access to give it a read.
Surprise #1 $750 million investment from Bain Capital
The $750 million is convertible at $27.75, which was 30% above the previous five trading days stock price. While I think it was generous to price this just before the quarterly earnings were released (I expect the stock price would risen somewhat even without the two surprise announcements), the investment from Bain is only good news. They have been a very successful firm and I expect they are going to make a whole lot of money on this investment in NTNX.
When a company like Bain puts almost a billion dollars into a company, they aren’t planning to hold it for 5-10 years, they will be looking to exit, most likely by Nutanix getting acquired, in the next 2-3 years. I won’t be surprised if they let the story play out and see the stock price grow to $65-75 two years from now and then it gets acquired at a premium somewhere close to $90-100/share. That would still be a valuation below $20 billion, for a company that would have revenue, likely around $2 Billion per year, potentially still growing at 25%+, with increasing profitability as the sales and marketing costs should really scale and decline, as a percentage of revenue, pretty significantly over the next couple of years as the subscription revenues renew. Some would have (should have?) thought I was crazy earlier this year buying Jan’22 $55 calls for $1.00-$1.50 when the stock was around $20, but I truly believed the stock could be $75-100 by the time they expire and had the potential to make 25x, or more, in less than two years…definitely a high risk, and still is, but I’m feeling a bit less crazy about those after this week’s news.
Surprise #2 CEO Dheeraj Pandey to step down
I know a lot of people on this board don’t have a favorable impression of Dheeraj, and I’m sure that is probably a sentiment shared by others on Wall Street too so, although I have always liked him, it probably is a good thing that he hand over the CEO role to a manager more capable of steering this ship as it grows from $1 Billion to $2-$3 Billion of revenue.
Dheeraj was one of the founders and was with Nutanix for 11 years. He was a visionary and helped guide this company from nothing into quite a sizable business, and one of the leaders in its industry. However, he probably wasn’t cut out to be a public company CEO for long. Searching on twitter for #NTNX and #Nutanix Thursday afternoon, I was blown away by how many co-workers were tweeting their disbelief and sadness that he was leaving the company. Even with all of the Nutanix financial and company news that had been released that afternoon, those posts were greatly overshadowed by the number of people expressing their gratitude to Dheeraj and wishing him well. No matter how the investing community felt about him, he clearly was loved and revered by those around him that worked directly with him.
I’m betting that Bain Capital wanted to install someone they felt would be a better CEO, as a condition for the investment. Dheeraj will continue to be CEO until they name a new CEO, but I’m betting it will happen pretty soon, probably before the next quarterly earnings. Dheeraj is still Chairman of Nutanix’s board of directors and I haven’t seen any indication that he won’t remain in that role, so he is likely to have a continued prominent role, despite “retiring” from the CEO role.
So that was lot of information to get dropped by surprise this week. Quite a few analysts were on the conference call despite the short warning about it’s re-scheduling, so there seems to be continued interest from Wall Street.
Just to give you an idea where my head is at right now (euphoric to say the least), Friday was definitely the most $ my portfolio has ever increased in a single day and it was almost all related to Nutanix. Although the stock was up about 30% yesterday, my NTNX holdings which include lots of call options, increased 80% yesterday, and is suddenly my biggest holding.
And I had a lot of those NTNX calls in my Roth IRA, which led to my entire Roth increasing by almost 30% in one day. That’s the craziest part to me, a couple decades of IRA contributions and 401k conversions, and it still moved up that much in one day and will continue to compound and grow for another couple of decades without ever being taxed! I had been buying lots of different Sept 11th and Sept 18th calls in in the IRA in recent weeks betting that the stock would move significantly after earnings and most of those have gone up 100% or more in just a few weeks, so those certainly juiced my returns. It was the first time I really bought a lot of shorter term calls on NTNX, usually sticking to LEAPs previously.
I got somewhat lucky in that I sold all of my Fastly shares on Thursday when it was over $97 (shares that I bought just a few weeks earlier for $77 and change) and put the proceeds half into NTNX calls and half into regular NTNX shares. The next day the calls nearly tripled! And the regular shares went up 29%. Sometimes, with timing, it’s better to be lucky than good, I guess!
Even after my 20% AYX holdings got slaughtered at the beginning of August and I was sure this would be a down month for my portfolio, I’m suddenly looking to be up a few percent, as long as it doesn’t drop too much on Monday.
I know there aren’t many on here that follow Nutanix these days so, besides an occasional mention in my monthly portfolio posts, I’ve only posted on the NTNX premium boards, but, so far, I’m glad I continued to follow the story and kept adding when the prices seemed disconnected with where I felt the value of the company headed, especially last summer and then more this spring and summer. At the same time, I certainly appreciate that many of you that are up 100%+ this year are very happy not to be holding NTNX since the beginning of the year (granted the stock had run up about 50% in the second half of 2019 and was at a peak when January started).
I still view the company’s valuation well below where I think it is headed and, despite it rising to now be my largest holding, I don’t plan to sell any purely due to Friday’s rise. I will have to sell the September calls as they get closer to expiration next month, and I’ll likely be reallocating that to other companies, but other than that, I still believe the story still has a long way to play out and will be bright ahead.