Nutanix (I know...)

Investment Analysis Clubs Saul’s Investing Discussions
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I know they are not popular 'round these parts, and I may be the only one that still thinks I have a market beating investment with NTNX, but, man, does it look like a good opportunity to me right now from a cost/benefit standpoint.

Just to take a sample of a few of the companies we follow, some that fall on the high end of the “expensive” range and some in the middle, it is pretty striking to me the disparity with NTNX:


stock    last 12mo rev     market cap
ZM         $392m               $26b
ZS         $272m               $11b
MDB        $297m                $8b
ESTC       $271m                $7b
TTD        $512m               $12b
NTNX     $1,240m                $4b

There is no question that NTNX deserves to be valued much lower than the other companies we follow from a P/S standpoint. Their growth has been minimal over the past year, while these other companies are growing at 50% to 100%+. No disagreement there.

But the disparity…NTNX makes triple the revenue of many of our companies meaning the others would have to grow at 50% for 3 to 5 years just to get to where NTNX is already at today.

NTNX’s margins are 75% overall, so a bit better than companies like ESTC and MDB, and a bit lower than companies like ZS and ZM. Not to mention that NTNX has been moving away from hardware, so margin% shouldn’t be a major differentiator in the valuation of it compared to other cloud companies.

So here we are with a lowly $4 billion market cap company that has generated $1.24 billion of revenue over the past 12 months, and is growing, while a company like ZM is valued at $26 billion (more than six times the value of NTNX) yet only generated less than $0.4 billion over the past 12 months.

Now you’re going to tell me that NTNX management stinks, they shouldn’t be trusted, etc, and I don’t blame anyone that has that impression about them and has sworn off the company. Go with your gut and with what makes you feel comfortable. But remember that NTNX has still only had one bad quarter reported. Yes, one. I know their stock went down a lot each of the past two earnings announcements, but six months ago, it was not because they had a bad quarter, but because management was being very candid and upfront with shareholders and let us know, in advance, that the next few months were not headed where they hoped, and the stock fell…and sure enough three months later, things were even a bit worse than what had been priced in, and the stock fell again. And on no news over the past two months, the stock price has continued to drift down and down and down.

In my mind, I respect management more for being open about the situation earlier this year and not letting shareholders get blindsided when results were announced a quarter later. I’ve never fully understood some of the backlash at the CEO as I just don’t interpret his actions as untrustworthy. And keep in mind this is the same guy that voluntarily gave up $17 million of stock, just a few years ago, before the IPO so that it could go into the pool that rewards employees and encourages them and aligns their interests with shareholders:

https://www.cnbc.com/2016/04/04/nutanix-ceo-dheeraj-pandey-f…

I know a lot of people got burned on NTNX this year. I know they talked about $3 billion in revenue in just a couple of years and it felt like easy money, and now the stock is down 50% or so from the beginning of the year. I’m sure it will take the markets a little while to get comfortable with NTNX again even if they do announce a good quarter or two and more optimistic outlook. So I do think it may be a good approach to stay on the sidelines and watch and if things turn around, there will probably be time to get back in and still reap the rewards.

I really think the company only needs to grow in the high single digits to have market beating returns, but I also think the potential is there for them to grow again at 20-30% for multiple years, which would make today’s $4 billion valuation really seem like a steal, which is why I still keep a good sized position in Nutanix.

Still another month until their next earnings release, but I post this today because the stock price has reached a new recent low at about $22/share that just seems too hard for me to resist so I added today. Call it a falling knife, call it the market knowing more than I do, but risk/reward wise, I like my chances.

-mekong

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I would just say that I don’t think you can compare them to SaaS.

I get that they are, or want to be, basically software, but they are still by and large an appliance play (meaning specific hardware is procured at same time…either the Supermicro pass-thru via Nutanix or approved OEMs like HPE, Lenovo, and Dell).

So they are infrastructure.
AYX, TTD, NOW, ZM, MDB, ESTC…these are all software solutions that run on infrastructure. They are considered more important than the underlying infrastructure. In the IT sales world, we say “follow the app” to get hardware sales drag or software infrastructure (Veeam, VMware) drag.

So they aren’t exactly on the renewal/recurring train in the same manner as the software stocks you compare them to. They have to spend more on sales to…sell more. Then when they expanded their portfolio too quickly for their sales team to handle, and they sold less HCI as a result, they had to get new sales leaders.

Clients are still talking about “does HCI make sense as my gateway to the cloud” so HCI is a real trend…one which VMware is winning. But ultimately those client architects don’t care a ton about who the HCI is as long as it works correctly. They care about their on-prem data and connecting to the cloud…how it happens is just underlying infrastructure and a means to an end.

It took me a while to take the view that even though Nutanix was moving from hardware to software, nothing was really changing a lot about the client sales cycle and ultimately this was still infrastructure. Nutanix tried to address this with greatly expanding the portfolio beyond HCI, but from what I saw, they put too much on the same sales reps vs having experts for each segment. Dell has vmware reps, storage (EMC) reps, server reps, and personal systems reps. They have an overall lead rep, on the bigger accounts, but they just play a QB role.

Could Nutanix make a comeback with a restructured salesforce? Maybe…but how many are they losing now that stock options have plummeted in value…a big reason a lot of sellers get into younger companies?

I was recently at a major OEM conference and the Nutanix guys couldn’t explain how who gets paid if Nutanix is on this particular OEM hardware. Sales people are money-motivated. (this was about a month ago, btw)

It could very well be a good bargain at these prices. I would just think of them more along lines of ANET, CSCO, VMware, PSTG…because that is still their bread and butter: IT infrastructure.

my 2 cents…which buys you 2 rides on the penny pony “Sandy” at Meijer.

Dreamer

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If they merely grow at high single digits the stock will get massacred compared to the overall market. No one is going to pay a premium for a stock that’s still not profitable and only growing high single digits. This is not a value stock. It’s still got a high growth valuation even if it’s cheap on relative terms compared to the stocks currently favored on this board. This is not some company with a PE of 8 and a chance to turn things around. This is an unprofitable company losing market share to their competitor if I recall because they’re growing at a slower pace than their target market is expanding.

Maybe they can turn it around but what evidence is there that they’re actually making progress towards doing it?

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The only strength I have seen with Nutanix is their customer count continues to grow.

Page 14 of the slides.
https://seekingalpha.com/article/4267413-nutanix-inc-2019-q3…

Customer count growth over previous quarter.
2018
Q1: 760
Q2: 1,060
Q3: 820
Q4: 920

2019
Q1: 880
Q2: 920
Q3: 780

This is the one constant with all their transitioning to subscriptions and getting rid of hardware sales. Their customer count continues on a pretty consistent upward swing.

Also, their short term deferred revenue was up 48% YOY (page 24 of the slides). This is revenue they are to expect within the next year.

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From NTAP today, the hardware world investments seem to be slowing down, reflecting what we’ve seen across industries from chips to storage

Our revised expectation for full fiscal year 2020 is that net revenues will be down between 5% and 10% year-over-year, below the company’s previously stated full fiscal year 2020 guidance issued on May 22, 2019,

Ouch. Two months later having to revise guidance?!

Given our revised expectations for full fiscal year 2020 net revenues, investors should not rely on our previous full fiscal year 2020 guidance issued on May 22, 2019.

Just a Fool

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NTNX’s margins are 75% overall

For a company where revenues are not growing single digit but actually gone down sequentially and y-o-y, close to $1B SG&A makes no sense.

Nutanix is broken pretty badly, we need to see if they can turn around on their sales, if not, how they are going to get to profitability.

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All very valid replies, and I do appreciate everyones’ feedback.

A few additional thoughts and comments:

For a company where revenues are not growing single digit but actually gone down sequentially and y-o-y, close to $1B SG&A makes no sense.

Yes, true that “total revenue” is down sequentially quarter over the quarter, only for the most recent quarter (the april 30 quarter compared to the January 31st quarter), after quite a run of consecutive quarters of sequential growth. However, looking closer you’ll see that it was entirely due to their hardware and non-portable software divisions, as they intentionally shift toward recurring subscription revenue. Subscription revenue increased sequentially by 7% and increased vs the prior year 102% (more than doubled).

Not to mention that I believe there is significant seasonality to their sales possibly due to clients spending remaining budgets during the fourth quarter of the calendar year, as you can see in 2017 and 2018 there was not significant sequential growth from the January quarter to the April quarter either, although they grew a lot those years.

Also, deferred revenue grew sequentially from Jan 31st to Apr 30th by nearly $60 million (and year over year by more than $200 million), which represents cash in hand for subscription revenues that will flow through the income statement in future periods, essentially guaranteed future revenue.

If they merely grow at high single digits the stock will get massacred compared to the overall market. No one is going to pay a premium for a stock that’s still not profitable and only growing high single digits… It’s still got a high growth valuation

Depending what periods we are looking it, NTNX’s growth has been at least a bit higher than “only growing high single digits”. Over the past 12 months reported, total revenue was up 12% vs the prior 12 months. And before this last quarter, it was 20%+. Subscription revenue for the past 9 months (they only started breaking out subscription and the prior year equivalent three quarters ago) has grown more than 100% in the last 9 months compared to the same nine months of the prior year. When you factor in the growth in deferred revenue, it further magnifies the subscription growth.

I would argue that a 3 P/S valuation on a company that, prior to this past quarter had been growing at 20% year over year, and when you include this most recent quarter is still growing at more than 10% year over year despite moving away from legacy hardware sales, and has recurring subscription revenue growing at over 100% is not exactly a “high growth valuation”. But compared to their negative earnings, I understand how you would look at almost any valuation as expensive/high-growth. Granted that could be said for any of our companies that are loss-making.

Regarding my comments about being a good investment if they only grow at single digits, you have to keep in mind that management has repeatedly said that they expect to get to $3 billion in bookings in less than three years. Even with the rough most recent quarter, they still only pushed back this goal by a few months. In order to get there, they have to grow, from what is already a very high revenue base, by about 40% per year for three years. Obviously, that is what they are investing toward and spending toward. If reality hits them in the next year or so that it’s unrealistic and they will only grow at 9-10%, their SG&A and payroll will certainly drop dramatically. When you’re not aiming to grow 40%, you won’t spend and invest to grow 40%. If that were to happen, they would be profitable almost immediately. It would be a very different company and a very different investment thesis than what we have today, but I think investors would do pretty good and it’s not a bad fall-back scenario if the company doesn’t experience the level of success that they expect in the near future. I didn’t suggest anyone would pay “a premium” for the company in this scenario, I simply expect it would be valued like other companies with similar metrics. Mostly likely this scenario would also lead to their becoming an acquisition candidate. Although I wouldn’t invest in any company simply hoping for them to get acquired, it does provide more of a possible backstop and reduce the chances of NTNX being a losing investment, while still providing the upside potential.

That being said, do I bank on them growing 40% and getting to that $3 billion number as soon as they have suggested…definitely not. But I also would not be investing in NTNX today if I only expected them to grow at single digits. I’m investing with the expectations that they will turn things around and, even if they don’t hit their internal targets and goals, can get back to growing in the 20-30% range. Assuming most of that is recurring subscription revenue, investors will be rewarded handsomely by the market from today’s value.

All that being said, I am no way suggesting that Nutanix is a sure thing, even from today’s valuation. Certainly nobody should “back up the truck” on NTNX today. It has been a bumpy last couple of quarters and if that persists for a few more quarters and beyond, it would make this a bad investment. Whether they can compete in all of the new areas they have expanded into recently with their new products is yet to be seen. But the TAM of the markets they are attempting to compete in, is a lot larger than it was a year or two before they rolled out so many new products.

I simply think the risk/reward from today’s prices for patient investors is a very good one, especially considering how much their subscription revenue, deferred revenue, and customer count are growing, as well as several reports that they have a huge number of job openings posted online (which is typically not indicative of a company in slowdown mode). This next earnings report and call (a month from now) will be their fourth quarter, which gets reported later after the period ended, and further into the partial new quarter than Q’s 1-3, meaning management will have a better sense of how Q1 is already going when they report, than they would in any other quarter, so we should have some really good insight into whether the situation is improving or not.

Again, I wouldn’t question anyone that has completely sworn off Nutanix, or just wants to to wait on the sidelines for a while and see how they play out. But I do think some people have lumped NTNX in with companies like PVTL undeservedly. In the long run, that could turn out to be accurate, but I feel this one still needs to play out, and their chances of success aren’t so bad.

-mekong

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I was like you Mekong up until about a year ago and truly, truly hope that your analysis proves to be correct. However, as Saul has repeatedly stated, are their other opportunities out there where your money could be more useful and never fall in love with a stock. Not saying you have here, but once a stock is broken, perhaps you should just move on? Look forward rather than backward regardless what “could be”.
You could be right in the end but it’s more about your mentality in dealing with what’s happening now as opposed to what could happen in the future.
Sometimes it’s better to just let it go.
Anyway, not a sermon just an observation that has helped me get back on the right track.

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I was like you Mekong up until about a year ago and truly, truly hope that your analysis proves to be correct. However, as Saul has repeatedly stated, are their other opportunities out there where your money could be more useful and never fall in love with a stock. Not saying you have here, but once a stock is broken, perhaps you should just move on? Look forward rather than backward regardless what “could be”.
You could be right in the end but it’s more about your mentality in dealing with what’s happening now as opposed to what could happen in the future.
Sometimes it’s better to just let it go.

branmin

I appreciate your thoughts and that you took the time to respond. I would say that all I am doing is looking forward, as per my two writeups above. What the company did in the past, and what they were worth 3 or 6 months ago shouldn’t and doesn’t factor into whether they are worth an investment today. Like with PVTL, I had no problem dropping them as soon as it was clear they would not have the amount of success many of us had expected and hoped. As much as I originally thought PVTL would be an incredible investment early on, I happily got out with a small profit and never looked back.

I, like many others on this board, was up more than 60% on my entire portfolio YTD as of last friday (despite keeping an investment in NTNX and having a very large investment in AMZN which has lagged so far this year), so I very much believe in the other opportunities that we discuss here and have been rewarded handsomely by many of them these past couple of years.

While I would disagree with the concept of a “broken stock”, I would argue that one bad quarter (which is all NTNX has reported thus far) does not a broken company make. I believe that NTNX growing at 20-30% for the next few years will result in better investment gains than many of our other SaaS stocks growing at 50%, given how they are currently valued and the multiple expansion that would result. Again, no sure thing, but I put my money where I feel it has the best opportunity and risk/reward, and I still like our chances with NTNX

-mekong

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Mekong,

How do you response / react to both NTAP and ANETs material changes to guidance based on cloud computing hardware slowdowns.

This is a direct impact to NTNX and their future, no?

Just a Fool

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How do you response / react to both NTAP and ANETs material changes to guidance based on cloud computing hardware slowdowns.

This is a direct impact to NTNX and their future, no?

Sure, I would definitely prefer to hear companies in similar spaces saying that the industry and market is booming. I don’t know enough about how closely each of them directly overlaps with Nutanix tho.

So that’s definitely something to keep an eye on, and may be a reason for someone to hold off and wait to hear from NTNX themselves next month.

-mekong

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One bad quarter, but underestimated twice by management. I don’t trust their judgement and that’s why I won’t even look at the company again.

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One bad quarter, but underestimated twice by management.

I don’t blame you for going with your gut, especially when you don’t trust management, and avoid putting your hard earned investment dollars into an investment in the company.

However, your “underestimated twice” statement is simply inaccurate:

During their Q1 earnings release in November 2018, they provided guidance for Q2 of $325-335m. They beat the top end of the range by reporting just over $335m of revenue when they reported in Feb 2019.

During their Q2 earnings release in February 2019, they provided guidance for Q3 of $290-$300m. They missed the bottom end of the guidance by less than 1% reporting $287.6m when they reported in May 2019.

That was the last time they reported. One under-estimation of less than 1%. Pretty darn accurate from my standpoint.

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a SaaS company growing at 25% or so may be well rewarded by nice stock price appreciation. Look at PAYC. But the market has to believe that this can keep up for years. Even one bad quarter raises questions.

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which represents cash in hand for subscription revenues that will flow through the income statement in future periods, essentially guaranteed future revenue.

I don’t get the double counting of the deferred revenue. In any case, what you should truly look into is, why the SGA is equal to revenue? Remember this is not a small company they are having $1B+ revenue run rate. At this level if they cannot get their SGA under control, then basically they are buying their revenue. The model is broken.

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“During their Q2 earnings release in February 2019, they provided guidance for Q3 of $290-$300m. They missed the bottom end of the guidance by less than 1% reporting $287.6m when they reported in May 2019”

Like I said, they underestimated twice. First by being surprised by a sales funnel problem, second on the actual effect on revenue. No matter, good luck.

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I feel like I have no certainty whether NTNX is going to $100 or $8. Will this year be a huge string of unfortunate events in their path to success? Or are “eliminating hardware revenue”, “sales cutbacks”, “subscription transition” all just excuses papering over a company that’s not succeeding? And will “global hardware slowdown” be the next excuse added to the list?

I’m still holding because I think it is plausible that they are going to demonstrate growth and if they do, they have enormous upside. But at the same time, I definitely feel like I have extended far too much patience to this team. Even if it turns out to be a winner, I agree with the sentiment of the board that this should have been dropped immediately and watched from the sidelines.

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mekong22,

i enjoyed reading your thoughts about NUTANIX.
But this thread reminds me about something I wrote just a while ago:

After reading all 60+ recs, one thing I noticed
… about Saul is the simplicity in the way he thinks / makes decisions - in a positive way.

It may be obvious to some, but for me it’s worth mentioning.

As an example I take this thread about Why Nvidia is still a good investment (which it is, but not in Saul-like high-growth style) from 8/28/2018:
https://discussion.fool.com/nvidia-revenue-growth-sustainable-33…

In retrospect it’s easy to judge, of course and I don’t want to discredit the author - he is most likely right about the longterm view.

But Saul took the easy path instead of digging deeper into the company to find more reasons which could justify Nvidias Growth.
So he was right to exit at the time he did and allocated his money into better, more obvious opportunities.

Takeaway: Life is easy. Why do we make it difficult?

The author of the thread, i linked above, tried to find good arguments for NVIDIA. There were plenty back then, and there are plenty now.
Perhaps NUTANIX will come back. Perhaps not.
Until then I would put my energy into the easy path.

mooo

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Hi mekong,

Here is their Q4 guidance issued on May 30:

For the fourth quarter of fiscal 2019, Nutanix expects:

· Revenue between $280 million and $310 million;

· Billings between $350 million and $380 million;

· Non-GAAP gross margin of approximately 77%;

· Non-GAAP operating expenses between $340 million and $350 million; and

· Non-GAAP net loss per share of approximately $0.65, using approximately 187 million weighted shares outstanding

So, it looks like they are forecasting revenue to be mostly flat compared to Q3 and down about 12% compared to Q2. Billings is expected to increase from $346M. The shocking thing to me is that they are forecasting Opex to be $340-350M! I guess I should be happy with that as their Opex for Q3 was $417M with $137M of R&D and $245M of S&M. Not good to see that their Opex is up over 50% yoy while revenue is flat. I understand they are transitioning into a new business model, but this is excessive. Their sales expenses alone of $246M represented 85% of total revenue for Q3.

A lot their Opex is made up of SBC with $122M in Q3. This is 42% of total revenue. It’s not just a Q3 occurrence as their SBC for the 9 months ended Q3 is $233M. I guess this is one way they can conserve cash. Someone pointed out that they may not be able to retain talented employees with worthless stock options. I’m too lazy to pull up the 10Q, but do you know how much of their SBC is options vs RSUs? If it’s RSUs, then the SBC is not worthless and may keep some employees from jumping ship due to the cratering stock price.

I appreciate that the Opex may decrease as a % of revenue in the future as they mature, but the current spending is scary.

It does look like one analysts sees an upswing as of July 11: https://seekingalpha.com/news/3477149-nutanix-plus-6_5-perce…

I haven’t followed up NTNX in a while but I remember they were partners with Google. I see VMware just announced a partnership with Google: https://finance.yahoo.com/m/91e27e6f-0c83-3b13-93bd-dc59e307….

I think the best view of how the business is doing will be to look at their main competitor, VMware who reports before NTNX. I do note that both VMW and NTNX are down big today, 8% and 10% respectively. This was due to NTAP which announced lousy earnings due to decreased enterprise spending on tech. I do think this market has softened quite a bit since May given the resurgence of the trade war and NTAP is the first casualty. I would guess that VMW and NTNX will also have softer market views as compared to May. This is obviously being priced into the stock price so NTNX may still be a good investment at 20, but I think the recovery will take longer than management expects.

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