NTNX & TWLO - A Hidden Growth Exploration

A caveat before I begin. The circumstances, companies, and their categories are completely different. Also, past events don’t predict the future, especially given the above caveat and a bull market one year older. But given the market’s reliance on algos and momentum trading, I thought I would share some recent research I did on hidden growth, as TWLO was my 2nd best performing stock in 2018 (FOSL was #1 and nearly a 4x, although that was only a medium-term trade in nature).

That being said, I believe we are seeing a similar pattern play out with NTNX as we did with TWLO last year. Yes, the FUD is different. And yes, TWLO’s financial mechanics were a bit more straightforward. But said simply, I believe NTNX is growing like crazy and their headline revenue numbers (and financial complexity) are masking a massive growth story.


Report Date	Fiscal	 Q Base Rev	Q Base Rev Ex-Uber	Share Price	EV/S
*5/2/2017*	Q1 2017	    62%		                       $22.80-$32.23 	5.7-8.4
8/7/17	        Q2 2017	    55%	              65%	       $26.86-$34.74 	6.4-8.5
**11/8/2017**	Q3 2017	    43%	              63%	       $23.25-$27.46 	5.1-6.1
2/13/18	        Q4 2017	    40%	              62%	       $32.25-$55.20 	6.8-12.2
5/8/18	        Q1 2018	    46%	              61%	       $50.57-$65.37 	10.2-13.3
8/6/18	        Q2 2018	    54%	              64%	       $62.43-$88.88 	12.8-18.5
11/6/18	        Q3 2018	    68%		                       $71.56-$100.47 	13.4-19.1

  • Announced Uber revenue was going to be decreasing over the next few quarters.
    ** Low price in stock, coincided with lowest forecasted headline revenue growth %.

As you can see, TWLO’s base growth rate (ex-uber) was remarkably consistent for 6 quarters, even before the Uber announcement (62%, 65%, 63%, 62%, 61%, 64%). Yet, its share price was held hostage until it finally projected headline revenue growth reacceleration (2/13/18), and was approaching apples-to-apples comparisons (fiscal Q1/Q2 2018).


Report Date   Fiscal   Q Rev	S&S Billings	Deferred Rev	Deferred Rev	Share Price	EV/S
5/25/17	     Q3 2017	67%	                  $463.00 	   102%	       $16.64-$24.87 	2.6-4.1
8/31/17	     Q4 2017	62%	                  $526.10 	    77%	       $20.02-$38.28 	3.2-6.5
*11/30/2017* Q1 2018	46%	   36%	          $408.80 	    48%	       $29.34-$38.90 	4.5-6.1
3/1/18	     Q2 2018	44%	   60%	          $478.00 	    57%	       $38.51-$60.00 	5.6-9.0
**5/24/2018**Q3 2018	41%	   67%	          $539.90 	    62%	       $47.57-$64.87 	6.7-9.3
8/30/18	     Q4 2018	20%	   66%	          $631.20 	    71%	       $35.38-$61.96 	4.8-8.7
11/27/18     Q1 2019	14%	   50%	          $701.80*** 	    72%	       $35.24-$46.93 	4.7-6.5

  • Announced new software-centric approach and gradual elimination of pass-through hardware
    ** Large drop in price, coincided with dramatic drop in forecasted headline revenue growth %.
    *** On a side note, I thought it was interesting that NTNX has $140m more in deferred revenue, than TWLO has in TTM revenue as a company ($702m to $561m).

I’ve already written extensively on NTNX and its financials, but suffice to say, its software & services billings and deferred revenue growth (which I believe are their two most important metrics), have been growing at pretty fantastic rates for the past 4 quarters. Certainly nothing that would prompt a 45% drop in price.

Either way, if you follow TWLO’s pattern, NTNX’s Q3 2019 (5/24/19) earnings would most likely be the apples-to-apples forecast that would cause headline revenue growth to reaccelerate, and create a rise in share price and EV/S multiples (seems like a 9 EV/S is a reasonable upside target based on past data, although one could argue that with 80% gross margins and a majority of revenue recurring, they should be worth more now).

All that being said, I invest both medium-term and long-term. I use different mechanisms to take advantage of trading ranges and opportunities. I am not confident enough that next quarter won’t be the one that causes NTNX to return to previous highs. That is why I invest most of my capital in long-term investments and try to remove the guessing. That way, I don’t have to time the market exactly. However, I have taken advantage of the most recent trading range two times now (support $36 and resistance at $46). Additionally, I have built a substantial position in call options to take advantage of what I believe will be a very prosperous 2019 for NTNX.

And as I am fond of saying, I have been wrong many times, and will be wrong many more times. Please make your own decisions. Good luck to all.



Stephen -

Thanks for the clear and concise comparison and insightful color. Real top quality post that lays plain what has been discussed heavily across the board regarding NTNX. Great stuff!

I did want to point out that I think the actual topline growth turnaround will be a bit later than Q3’19, but it might not matter regarding share appreciation timing given the forward looking nature of the market. It all revolves around the Pass-Through HW Elimination amounts in the comparable periods. I have the actual amounts as follows from the earnings slides:

Q1’18: $0
Q2’18: $14
Q3’18: $52
Q4’18: $95
Q1’19: $104

*I need to learn how to make the great tables you show above so apologies this isn’t in as clean of a format as you have above, but I didn’t want it to hold up the post

In the above profile you can see the steep acceleration doesn’t taper until after Q4’18. Assuming this pass through amount continues to increase (elim % is already approaching 100% but overall volume will be growing), I don’t see the comparables really flattening out until Q4’19. At this point the pass through growth will still be a drag but less material. I think y/y growth % might see a slight bump in Q3’19 but then a steeper acceleration in Q4’19 and beyond.

All that being said, If NTNX accounts for this in their Q4’19 guidance we may go ahead and see the initial bump at Q3’19 earnings as you are predicting.

Similar to you I don’t consider myself “that good” and I have been wrong many times, so I am already invested in NTNX (though a smaller allocation than I may shoot for by May).