Esoteric is actually bad for investing health.
So here’s my take . . .
I recently pretty much completed a song I’ve been working on for close to a year. It’s a complex four and half minutes of music with numerous extended harmonies and odd progressions, unusual rhythmic figures, four different time signatures, a modulation at the bridge where the instrumentation and feel radically change. And on top of that, the lyric is somewhat obscure with respect to the story that unfolds. It started as a simple guitar lick and just evolved . . . I sent it to a friend for a critique. He’s a highly respected composer with a lot of awards, credits and recognition. His comments were (summarized) “It’s well composed, but perhaps too esoteric, who’s the audience?” Didn’t surprise me. I think the song will have a world wide audience of maybe 12 listeners - if I can find them.
The point is that esotericism confounds and bewilders people. Deep, complex subjects tend to be not just ignored, but shunned. Esoteric subjects are discomforting.
Nutanix deals in an esoteric space. I started a position in NTNX rather late compared to several other participants on this board who follow these new technology companies. At first, I was uncomfortable with this investment and kept my position rather small. Even as a former techie I had difficulty understanding what they did. To be honest, even though I’ve gained a better understanding of what HCI is, I still have difficulty understanding how it’s accomplished.
I’m not like Saul. He can look at the numbers and make a decision with little understanding of the underlying products. I get that. The underlying attitude is something like I don’t have to understand it, the people who need to have an understanding are the ones that are buying it and that’s reflected in the numbers. But personally, I like to have a more of a grasp of what business the company is in. I think a lot of investors are more comfortable with their decisions if they understand what the company’s products do.
Nutanix deals in an esoteric space and because of that it is a difficult company to understand. This gives rise, I think, to a number of phenomena. First, there’s just a reluctance to invest in it. Take a company like Square, that’s easy to understand. And when you dig into their different offerings, none of them leave you questioning about what it is and who’s buying it. Anyone can understand the product offerings with little effort. Understanding the ecosystem takes a little more brain sweat, but even that isn’t out of reach for most investors. Even a reasonably high tech company like Twilio is not all that hard to understand. Now, give me your 30 second elevator pitch on Nutanix. Folks just scratch their heads and become confounded. A lot of folks just opt for an investment that’s more easily understood.
Another phenomena (and it’s reflected in several comments on this board) is lack of conviction by those who do invest in it. The sense that their knowledge in incomplete (which is true for any and every investment) but in this case there must be more savvy investors with deeper knowledge so when the stock turns down, that lack of confidence informs them to get out. As more investors head for the exits, there’s more downward pressure on the stock price and fear compels more investors to sell. In the absence of any mitigating factors, this becomes somewhat of a vicious circle.
And yet another phenomena is just plain FUD. Hyperconvergence is a marketing buzzword. It evolved from the concept advanced by Stuart Miniman which he named Server-SAN; basically a server that controlled a storage area network as a single entity. This concept came into being about 6 years ago.
Hyperconverged infrastructure (HCI) as a concept and a buzzword did not exist prior to 2012. It’s understood to be desirable, even necessary while being bereft of a well defined meaning. The word has taken on an aura of its own, it has power even if it has little meaning. It’s akin to a political slogan; meaningless and powerful. As a result, the competitive landscape is full of companies making claims that may or may not be valid. I’ve seen ads for IBM’s hyperconvergence products (and if you dig in a little deeper, oh yeah, “powered by Nutanix”). But if you’re just skimming the surface, it appears that IBM is a competitor rather than a partner. Does VMware offer a competitive product or are they also a Nutanix partner? Google it. It’s not immediately evident. And then there’s Cisco and HPE and Microsoft and . . .
What I’m getting at is that it looks like there’s a lot of big time competition in this space. Nutanix doesn’t appear to have much of a moat or a very strong competitive position, just another one of many facing strong competition from much bigger companies. What’s the big deal? With so many apparent competitors HCI looks a bit more like a commodity product.
So, to sum it up, we’ve got a poorly understood, esoteric space which leads to reluctance to invest from many and lack of confidence by several who do invest coupled with a lot of FUD which is direct result of the fact that it’s a poorly understood space.
What will mitigate this problem? Numbers. As Nutanix’ numbers reveal the hidden growth which is now obscured by their product transition from pass through h/w to almost all s/w the numbers will tell the story that most every investor will understand.