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.
TWLO
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).
NTNX
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