Nutanix-A Warning

Investment Analysis Clubs Saul’s Investing Discussions
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I and others were once fairly confident on NTNX. They were the inventor of HCI for all intents and purposes and had the “best in breed” product at the right time. I think the analysis in contemporary respects was appropriate for the knowledge and market that we had.

But the story changed drastically last quarter and was backed up this quarter. I exited within minutes of that first earlier earnings report. The thesis was broken but we didn’t know exactly why and management appeared unconvincing if not downright disingenuous.

Some are still in it, I believe, because there is still some debate going on. So I think the following is important to pass along.

DellEMC has an HCI offering as well. Here’s how the product is doing.

“In addition, software-defined data center solutions and HCI continue to grow at a healthy clip with VxRail growing triple digits again in Q1.”

Well that about says all we need to know.

VxRail triple digit growth. Though dollar amounts we don’t know. From the call, VxRail is doing something with VMWare Cloud that looks quite revolutionary and is probably something way better than what Nutanix can offer.

For further info here’s a link on the VMWare Cloud foundation on VXRail.

“So it would be great if you could actually put VMware Cloud Foundation on top of hyper-converged because what a hyper-converged system does at the end of the day, is it brings those public cloud features, functionally, agility and scalability on to the private cloud. … Dell and VMware coming together makes absolute sense in bringing VxRail running VCF inside the data center that can then extend to VMware on AWS, and now you have a true multi-cloud operating system. It’s just genius to see how they can bring this all together and make one operating system for the multi-cloud world.”

https://www.crn.com/news/data-center/vmware-cloud-foundation…

A case study in the disruptor getting disrupted. This is a huge problem for Nutanix. I’m not sure they can recover from this. Sales leads my rear.

Darth

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Darth,

I still own Nutanix, am biased, price anchoring and committing virtually every imaginable sin a Foolish investor can commit. I am also a tech chimp. That said…

This tech site says Nutanix vs. VxRail is a draw…

https://www.itcentralstation.com/products/comparisons/nutani…

This Free PDF by another tech site says it’s a draw…

Dell EMC VxRail Advantages
• Breadth of ecosystem
• Enterprise applications certified
• Vendor maturity

Nutanix NX Advantages
• Solution integration
• Multi-hypervisor flexibility
• Scalability

https://www.unitrends.com/wp-content/uploads/181011-DCIG-Poc…

This Expert Sells Both

He seems to lean a bit toward VMWare but says it depends on client needs.

http://www.diyar.online/2018/11/the-last-hci-vsan-vxrail-and…

HPE Deal

Seems Nutanix and HPE are going to war with Dell/VMware

https://www.hpe.com/us/en/newsroom/press-release/2019/04/hpe…

Bottom Line

It seems to this chimp that a great battle is just getting started for a huge market. I do not disagree with anyone jumping out of Nutanix - it’s been objectively a great call. Also, might the growth of VxRail tripling be from a low number meaning it’s not as fatal as it sounds for Nutanix?

Nutanix is barely 10 years old, just went public. I know some are questioning the CEO’s candor and appalled by the “we need better sales execs” excuse. But some growing pains as your valuation shoots into the billions, sell many high-tech products in a fast-changing industry, are fighting to disrupt a major space, while a relative infant seems like it might be entirely legit to me.

I know the Saulinian Hypergrowth Method lets the numbers do the talking and Nutanix messed the bed twice now so again, no doubt fleeing the ship is legit. It just doesn’t seem to me like the battle is remotely lost yet. And HPE just gobbling up Nutanix could easily happen. I know we don’t make decisions based on possible buy outs but I’m trying to get all my Foolish sins out of the way with this one pick.

Best,

BD

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One more quick thought - isn’t also possible that when you have two warriors going at it hard they bring out the very best in each other and combined, scare off competition from entering the space? Could be a Coke/Pepsi situation here where both win big?

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Why invest in a war when so many other companies are creating bloodless empires? Valuation…there is no other reason. Same old trap. It is a war and Nutanix is losing! The best they can hope for is a war of attrition. Either way war destroys. War does not create value.

An acronym exists that may be the most important criteria in all investment - CAP. Nutanix’s is closing on approaching zero in this war.

Hey, each to their own.

Tinker

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“It just doesn’t seem to me like the battle is remotely lost yet.”

What is your reasoning for this? What strength are you seeing from Nutanix they are winning this battle?

As of last quarter they are not the market leader and after these numbers they surely are trailing even further.

You don’t get all your foolish sins out of the way by repeating them, you stop doing them.

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I get free email updates from Ark Invest, who run ARKK among other ETFs;

I have absolutely no opinion, understanding or position on NTNX, but here’s what they wrote in their email:

Nutanix (NTNX) was down -16.4% on Friday after reporting weak third quarter earnings. As has been the case with other companies transforming from enterprise license and maintenance models, the shift to subscriptions billing has hurt revenue recognition, creating roughly $30 million of headwinds. On the plus side, sales lead generation is up 40% quarter-over-quarter and subscription revenue exceeded expectations. We believe Nutanix remains the best in-class provider of cloud-like infrastructure for enterprises and, in our view, its stock has the potential to appreciate four-fold to $20 billion in market cap during the next five years.

I held CYBR around 2016-17 and loved their Privilege account management position in the cybersecurity space (they were the only one in this space). At the time, they were transitioning their billings and each time, they got hammered after each earnings report because they were “expensive.” It might be a similar deal here. You might have to suffer for a few quarters to say, “I WAS right!”

Also, when everyone’s on the same side of a stock (all bear for NTNX) in this case, or all bull for some other stock, it’s also not healthy. There’s always something to worry about.

DoesMIWork

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Here is what, from a structural perspective, may “save” Nutanix, and it is a long term play. That is HCI is now transforming into hybrid cloud. Hybrid cloud will be expanding to the IoT world and 5G and the network is your data center mentality that Zscaler enables.

With each new transformation comes opportunity to be the provider of the product that wins the day. Nutanix with Xi is already anticipating these future moves. Thus, it is not like there is no hope. However, as a bounce play that just is not gonna be me here. There are far more profitable ways to invest absent FUD. Nutanix is not going through a FUD event.

Tinker

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12x,

I don’t have the tech expertise to argue this - and I don’t want to clog the board with a stock that obviously most Fools here have moved past. But to answer your question, the evidence I see is…

I like the CEO. I put a lot of value in management.
I have posted links to expert sites that rank Nutanix as a leader
The company has almost a billion in cash to innovate with.
Their Next conference drew 26,000 - they are obviously well-known and working hard to build brand, educate customers/potential users
They are young, hungry and building worldwide operation. Legit to me there are hiccups. They seem widely admired based on my review of sites, social media, articles about the company.

Pandey said on the call,

We saw a number of enterprise successes in Q3, which highlights the fact that the fundamentals of the business and competitive positioning in the large and growing HCI and hybrid cloud markets remain strong. During the quarter, we continued to see momentum in large deals closing 50 worth more than $1 million, including eight worth more than $3 million, we now have 18 customers with a lifetime spend of more than $15 million and nearly 850 customers with a lifetime spend of more than $1 million, and our customers remain enthusiastic about AHV or hypervisor, increasing adoption hypervisor to 42% this quarter ruling 4-quarter basis.

They are winning huge deals, and the 250M from Generation Capital tells me large buyers and investors see plenty of value/upside. With decade of experience, nearly billion in cash, large customer base to study, analyze - I’m just not ready to write them off.

Tinker

“War does not create value”

I am literally speechless at this line. “war” - competition - competitors pushing each other to outdo each other is the essence of free market capitalism. As Nutanix goes to subscription model with rising margins this doesn’t seem like “war of attrition” to me. They are providing mission critical products/services that won’t be driven to Wal-Mart like margins.

Anyway, I’m out on this thread - it clearly no longer meets the criteria for a hyper growth stock and I respect that. To add more detail would require sharing proprietary info.

Bottom line: I think Nutanix is far from dead. It’s not a top stock, I don’t own a huge position, so I’m willing to wait and watch. I have much more faith in TTD, TWLO, AYX, but am not comfortable having more than 10% of my port in any one position, though I respect idea I could easily sell out of NTNX and add to those.

Fool On,

BD

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I am literally speechless at this line. “war” - competition - competitors pushing each other to outdo each other

That is the whole point. How much real competition does Alteryx have or Zscaler or Okta or Amazon or SHOP? Very little. You can say the same thing about Veeva and ISRG, slower growing companies that maintain high multiples the defy their growth rates.

Why? Dearth of real competition. It is this lack of real competition that has been the driving factor behind almost every great stock story of the last century. Competition reduces economic returns to zero. Dearth of competition enables economic returns to exceed the return to the mean textbook mentality.

But again, each to their own. Investing it not about companies pushing each other to be their best. It is about companies creating true economic value. Dearth of competition vs. near warlike competition. Let me know which scenario you prefer to invest in.

EMC and VMWare will tell you. Neither had much in the way of real competition. By real competition I mean companies that can effectively give the other company a real run for its money and not just eat the scraps.

One might want to list the name of historical companies that had real competition, in a dog eat dog like fashion, that created superior returns vs. the names of those companies that did not have to fight such competition that created superior returns.

It is an excellent exercise to demonstrate why CAP is such an important element of any investment.

Tinker

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I get it - Buffett’s analogy: own the only tollbooth into the island. I would rather invest in this tollbooth than a tollbooth on another island with ten other tollbooths competing for car fares. But I might consider it based on number of cars and where my tollbooth is positioned, who runs it, how fast it moves cars through, etc. And I might not put 100% of my money in first one as hurricane or other act of God might destroy it.

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How much real competition does Alteryx have or Zscaler or Okta or Amazon or SHOP?

Well, I would say OKTA does have competition as their single sign on and multi factor authorization product line converges more and more into the security industry with Zero Trust Authentication. In fact there was an article in today’s Investor’s Daily about Zero Trust Authentication and how it’s basically uprooting the perimeter defense firewall market. OKTA is one of 8 “contenders” to Palo Alto and Symantec, yes, Symantec, for Zero Trust Authentication according to Gartner, and more and more of these companies are offering Single Sign on and other product lines that OKTA has been doing successfully for years. Yes, it seems OKTA is best out there for SSO, but they are facing more and more competition.

And their growth has been slowing.

But it seems the market does not care. In fact their stock went up 7% yesterday after releasing earnings just holding growth steady at 50%. I had sold earlier so missed this 10% upside. Clearly it was a mistake to sell as the market does not seem to care. Even if OKTA had a 48% revenue growth next quarter seems the market would just shrug it off as even at 50% revenue growth rates what’s expensive now will quickly become inexpensive down the road. So I bought back in but realize their stronghold in their legacy lines are seeing more competition and they are entering more competitive markets.

As for Nutanix switching from non-portable to subscription revenue model as a main cause of it’s problems, I’d like to know where ARK is coming up with this $30 million headwind number? Billings should tell the whole story because billings go as far as the contract period out and they average 3 years. Even billings is not growing year over year. So how is that Nutanix’ problem? Billings were up 11% YOY this quarter versus up 67% YOY last year Q3. If anything if that’s the real problem billings should be growing even faster. That’s how I look at it.

I’m concerned ARK is a lot of hype after I realized a lot of their returns were from bitcoin. Let’s see if they can repeat their historical return (although bitcoin is heading back up again).

As for Nutanix value play, I have done value plays in the past. What you need is a catalyst. There is only one catalyst I see. If what Dell/VMW is doing, now that they are going after NTNX with a vengeance, can be fixed with this Nutanix/HPE deal. But one would really have to figure out what Dell/VMW did, if HPW is in a position to help NTNX resolve this, and what the terms of the deal are. You don’t invest on turnaround plays based on “hope” or “liking the CEO.” There needs to be sure signs the stars are aligning in their favor and the same people are smart enough to get themselves out of the same mess they were dumb enough to get into to begin with.

As for “too many people against NTNX and that’s a contrarian indicator.” I believe you have to be careful with that because I felt the same way about SaaS prices and this board but realized this is just a collection of like-minded investors. What you have here is a board full of momentum/growth investors. It is a microcosm of what goes on in the market and how people think. If this were “Bert’s Technology Value/Turnaround Board” I’m sure everyone would be all over this NTNX situation. If you add up all of the “Saul Stocks” their market value is probably less than $100 billion. If that even. A drop in the bucket compared to the $18 trillion of just NYSE alone. And not everyone in “Saul Stocks” has the same investment style or invests anything like Saul. As we can see on Saul’s very own board there are disagreements with NTNX and how to handle it. I have been investing for 22 years now figuring out things like what to do with NTNX (I sold it as soon as I could AH last quarter’s ER without knowing what Saul did/was doing) but somewhere along the way I did learn what to do, and while maybe Saul is not the only way to do things or perfect, but from what I have seen if one were to pay attention to his messages you could save decades of trial and error and getting whacked by a 2x4 until you got the message. Not to say there’s only one way to invest in the market but it’s what seems right to me.

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…not everyone in “Saul Stocks” has the same investment style or invests anything like Saul. As we can see on Saul’s very own board there are disagreements with NTNX and how to handle it. I have been investing for 22 years now figuring out things like what to do with NTNX (I sold it as soon as I could AH last quarter’s ER without knowing what Saul did/was doing), but somewhere along the way I did learn what to do, and while maybe Saul is not the only way to do things or perfect, but from what I have seen if one were to pay attention to his messages you could save decades of trial and error, and getting whacked by a 2x4 until you got the message. Not to say there’s only one way to invest in the market, but it’s what seems right to me.

Thanks 12x for your kind words, and also I’m glad that you feel that you have learned something from what I’ve tried to teach. And I’m also glad that you realize that I don’t always get it right (but I don’t need to get it right 100% of the time, what I need to do is recognize when I have got it wrong, and be willing to admit it to myself and the board, and correct it).

Best,

Saul

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It’s interesting to see what NTNX is spending money on.

Their S&M expense was $245 million last quarter. If it’s anything like that again next quarter, let’s say $255 million, they will have spent $910 million on sales and marketing. Clearly they won’t be able to say they skimped on “lead generation” this year! It will have been up 40% over last year’s S&M expense. Last year they spent 30% more YOY on S&M expense, so they are doing the exact opposite of what many companies do by reducing % on S&M as they scale larger and larger. Danger sign #1. On the other hand, they are also spending a lot more on R&D as well. Last year R&D went up 9%, if they keep it up this year R&D expense will have gone up 64%.

So it seems their strategy is to spend their way out of this sales growth funk they’re in. Maybe something will become of the huge R&D they are working on.

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Since no one seems to consider this clogging I’ll add another.

Yeah, 12X I did notice when searching that they put on big shows, seem to have huge events and spare no expense.

One thing I particularly disliked was seeing two jugglers throwing bowling pins at each other. Not a fan of that nonsense. So you may be onto something there. They might be a little too slick and downright wasteful/brash. It seems they feel this is the time to invest heavily in getting name out there and winning allegiances. I could see my two favorite CEOs, Charlie Munger and Michael Corleone being very unhappy with those bowling pins. May be a meaningless thing to most but to me it does make a statement.

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12x,

Billings were up 11% YOY this quarter versus up 67% YOY last year Q3.

Billings would be expected to slow down during a switch to a sub model and removing hardware simultaneously. Better metrics are probably ACV growth, sub as percent of revenue growth and deferred revenue growth.

No doubt spending needs to be considered and lately it hasn’t trended the right direction.

AJ

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Billings would be expected to slow down during a switch to a sub model and removing hardware simultaneously. Better metrics are probably ACV growth, sub as percent of revenue growth and deferred revenue growth.

Right, thank you for that. I got that mixed up even though I was tracking all this when I owned NTNX.

Deferred revenue was up 55%. Short term deferred revenue was up 47%. Short term deferred revenue (revenue they expect to recognize within the next year) is probably the most telling number there is and the best indicator of health of the business.

So that number is actually pretty strong.

We have to remember that as they are growing deferred revenue they are building up on average 3.7 years worth of revenue (that’s the average contract period, and the length of the contract period is actually growing), so it will, obviously, grow faster than sales.

So Q3 of 2019, short term deferred revenue grew 47%. Q3 2018, it grew 62%.

I also notice their customer count growth is strong.

https://s21.q4cdn.com/380967694/files/doc_financials/2019/Q3…

Ideally, I’d like to see their short term deferred revenue growing faster than it is. Subscription revenue that deferred revenue will generate is still only 65% of the mix, so there are still non-portable licenses being generated.

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A case study in the disruptor getting disrupted.

And also in VMWare confusing everybody just as badly as Nutanix has been. ;^)

Remember, like 6 months ago, a lot of the hype on MF around Nutanix was for the “hybrid cloud” - where an application can be moved seamlessly from the public cloud (AWS, Azure, Google Cloud) to your private cloud (which could an supplied via an HCI solution like Nutanix). When Nutanix was really popular here there were more than a few misguided posts (like this on the paid NTNX board: https://discussion.fool.com/4056/maybe-it-doesn39t-matter-but-th… )believing that Nutanix had already achieved that.

They hadn’t. I posted about what was really going on here: https://discussion.fool.com/what-nutanix-really-does-33158672.as…
Where Nutanix is going next is integration with public cloud solutions. They call this Nutanix Xi Cloud Services. Today you can’t instantly run an application on either AWS or your private cloud. … I think one needs to be careful here not to overstate what Nutanix actually does today. Nutanix has some very cool stuff, but they’re promising more in the future in terms of the “hybrid cloud” than they’re actually delivering today. That may mean the company has a big runway of growth, but there’s also risk in if and when they can actually deliver.

So, now with Darth’s uncovering of what VMWare/EMC/Dell have said they’ve done (which does sound really good), it may pay to look at some additional detail (Nov 2018): Another feature called NSX Hybrid Connect, quietly introduced on Cloud Foundation 3.0 this summer but being trumpeted with the latest release, makes it possible to use vMotion to move workloads across clouds, as could previously be done only across server nodes. https://www.crn.com/news/cloud/vmware-upgrades-cloud-foundat…

It sounds like VMWare has stuff that can run on public clouds, and so if you run on VMWare’s stuff on AWS, you can move it to your own private cloud also running that “stuff.” But, it isn’t clear what you have to do on the public cloud and whether the private cloud is one of their HCI instantiated clouds. For instance, they also say:

Among the new features is “multi-site functionality” that allows stretching vSAN storage clusters across data centers in metropolitan areas as one implementation of a hybrid environment, something particularly desirable to European customers

But vSAN isn’t part of an HCI setup! Traditional HCI (is HCI really old enough now to have a “traditional” flavor? Maybe not, but the tech is moving so quickly it feels that way) is really just an easy way to setup one or more machines, each with compute, storage and networking, and have them connected for form a cloud (or cluster). Each node in an HCI cluster/cloud has its own storage, and that storage is shared among all the nodes in the cluster. The whole point of HCI is to not need separate storage units.

What VMWare has done is to use HCI to create stand-alone storage that itself uses HCI like software for setup and expansion. Note that you have to watch out, because VMWare’s “vSAN” is different than Cisco’s “VSAN.” Ugh. I understand why VMWare would think this is a good thing, because traditional HCI provides a balance of compute, storage and networking that is not appropriate for all applications, but still it’s not traditional HCI.

Anyway, if what Darth uncovered is really true, then as he points out, it’s really big and is something that Nutanix’s Xi has been striving for, but still isn’t yet there. I’m not really involved in this space, so it’s hard for me to separate the promise hype from the actual reality. It does sound like if you’re running applications in the public cloud on the right set of VMWare software already that you could then setup a private cloud that provides the same environment to those apps, making migrating them very easy. That doesn’t mean that the private cloud is as easy to setup as Nutanix’s HCI, and it also means that you have to run inside the VMWare stuff in your public cloud, which you may not be doing and so porting over to that may be harder than just migrating the app to a private cloud.

But, even if true, is this ease of migration really the killer use case for HCI?

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How much real competition does Alteryx have or Zscaler or Okta or Amazon or SHOP? Very little.

Have we really forgotten the days when Shopify investors were worried about competition from Amazon. And, indeed SHOP started taking off when Amazon closed down Webstore and instead said it would partner with Shopify (https://www.theglobeandmail.com/report-on-business/internati… )

Does anyone think Amazon’s growth story, AWS, does not have fierce competition from the likes of Microsoft (Azure) and Google (Google Cloud)?

Does anyone think Okta doesn’t have competition from Auth0, Microsoft, or Ping Identity?

Does anyone think Zscaler isn’t competing with Symmantec?

Sure, we’ve chosen the leaders, and in some cases their lead is substantial. If they don’t have real competition, then they’re not in an attractive market.

As for the problems with Peace and benefits of War, I refer to Orson Welles from The Third Man: https://youtu.be/nyuJQ_UO7OE?t=4

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Have we really forgotten the days when Shopify investors were worried about competition from Amazon. And, indeed SHOP started taking off when Amazon closed down Webstore and instead said it would partner with Shopify (https://www.theglobeandmail.com/report-on-business/internati…… )

Does anyone think Amazon’s growth story, AWS, does not have fierce competition from the likes of Microsoft (Azure) and Google (Google Cloud)?

Does anyone think Okta doesn’t have competition from Auth0, Microsoft, or Ping Identity?

Does anyone think Zscaler isn’t competing with Symmantec?

Yeah, I really do think they are “real” competition. Microsoft’s Azure cloud is focused around Office and other Microsoft products that are all proprietary and unique to Microsoft.

Zscaler has practically no competition from Symantec. See our discussion of Bluecoat, both recently and last year. It has been an utter disaster for Symantec all while Zscaler explodes.

OKTA has competition here and here and everywhere, but frankly when a company makes a decision to go with a solution to the problem they are trying to fix there is no one else with the scale, pure cloudiness, and scope of services. Head to head, absent specific niche circumstances, yeah, Okta has no “real” competition.

So the answer is yes, they do not have “real” competition. If you want to call Symantec real competition with Zscaler you have not been following the market. That is the most obvious of the examples you cited.

On the other hand it is turning out that HCI is a commodity, interchangeable and like in storage with EMC and Network Appliance and Pure, every sale is being hotly fought over. Not based upon proprietary silos (you don’t intermix Symantec/BlueCoat with Zscaler or Office 365 with AWS, or OKTA with Microsoft) the competition is based on other factors than proprietary advantages that each product has. This is real dog to dog sales competition.

War is war, the winner dominates the loser, or there will be a new war. If the winner cannot dominate th loser then there is attrition that depletes all sides. Either way, unless you are investing in the dominant and ultimate victor, why would you ever want to invest in a market that is that hotly contested?

To me it sounds obvious, perhaps not to everyone. When Nutanix can start selling itself because it is Nutanix, like Mongo does because it is Mongo (not just another database) then Nutanix will again start to be something with great investment potential. It will also help when the cyclical nature of storage starts to recover again. Another strike against Nutanix, it is cyclical with the storage industry. Further, we are seeing just how dependent Nutanix was on Dell. Nutanix has now had to crawl to HP and HP crawled to Nutanix.

Tinker

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True Smorgasbord, about every company out there has competition. But some have such an advantage over their competitors they render them irrelevant. Such as Intel vs Cyrix or AMD, or ARM when it cane to Mobile processors vs Intel.

Just as you (it was either you or Strppebwulf) who declared the NoSQL winner declared. So MonhoDB competitors are irrelevant.

That kind of thing.

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