Nutanix Is A Strong Buy

Most of what would be said in here would already be familiar to those that looked at Nutanix already but still this might contain something someone never considered before, so I am posting it.

By Julian Lin, seekingalpha.com:

Summary

Technology stocks have sold off harder than the rest of the market.

NTNX is now trading at low valuations despite very strong growth run rates.

NTNX benefits from the increased development of the cloud because it essentially is the operating system of datacenters.

NTNX is a strong buy and potential double over the next year.

cont’d

https://seekingalpha.com/article/4213204-tech-fallen-nutanix…

Starrob

8 Likes

The contrarian in me is not real happy with all these strong buy ratings. It indicates that there is no secret here, no misunderstand aspects, but yet the shares are still falling faster than the market. The shares are also fundamentally cheap, and not just comparatively “cheap” but fundamentally (using textbooks) expensive.

This said, the strong buys are probably correct. Hard to see Nutanix not more valuable a year or two from now. Nevertheless, this sort of dynamic I do not like when the market continues to work so hard against it. When the underlying stock is also fundamentally cheap it is for me, as a rule of thumb, reason to get out.

All rules have exceptions of course. I have made Nutanix a rare exception to this general rule. I still don’t like it. I would rather see articles talking about Nutanix’s slowing growth, large risk with product transition, etc. And sure you find these things piece meal, but you don’t really find people just coming out and saying it. Whereas many people are coming out and saying it is a Strong Buy and give good reasons why and yet no one (by market reaction) seems to believe these people. In fact, the stock continues to move more negatively than the market.

What you gonna do. As I said, I have made Nutanix a rare exception to this rule - perhaps should not, it is hard to argue the quality of the company and its positioning. A good new piece of information is Nutanix’s strong move into the Federal government. The Federal government appears to have been a good proportion of the larger deal sizes. Is this papering over slower growth in the private sector?

That is an issue we have not looked at. These largest sales in history and many million dollar plus sales came from this new Federal market.

If one is looking to try to find a negative that has been unspoken, perhaps that is it. It is quite the positive as long as it is not papering over private sector business. But this is nit picking and just opening up discussion, if any, is worthy of this topic.

Tinker

17 Likes

The contrarian in me is not real happy with all these strong buy ratings. It indicates that there is no secret here, no misunderstand aspects, but yet the shares are still falling faster than the market. The shares are also fundamentally cheap, and not just comparatively “cheap” but fundamentally (using textbooks) expensive.

XMFBreakerTinker

Sometimes that philosophy works and sometimes it doesn’t. Another market observation that that I have observed seems to be that markets often can become overly optimistic on a company on the upside and overshoot where a company should rationally be valued and markets often become pessimistic and overshoot on the downside far beyond where they should rationally value a company.

It has also been my observation that most investors favor momentum type investing…meaning most investors like investing in the direction of when the price momentum of stock would be going up.

David Gardner’s philosophy seems to loosely be that way as I have often seen him tell people to buy as that stock would be going up and to avoid buying the dip.

I have found it can often be difficult investing against the crowd because when the stock would be going in the opposite direction that I believe it should and I buy on the way down, it can feel like a falling knife and I wonder if the “crowd” or the “professionals” know something that I don’t know.

After awhile, I learned that it’s hard to determine the odds on whether investing against the crowd would be the correct strategy or not in any given company because all investing deals in uncertainty and lack of information.

Here’s how I view it. Nutanix has more upside than most of the other alternative tech investments that one could invest in today. However, Nutanix has more risk than many other investments that I am considering. If someone wants to be more certain about their upside then they should invest in something like Paypal but if one desires more upside if one gets proven correct then Nutanix might be a better choice.

I view it as a risk vs reward balance. How much risk does a investor wants to take on to get the reward and that’s a very personal decision.

Starrob

11 Likes

Whereas many people are coming out and saying it is a Strong Buy and give good reasons why and yet no one (by market reaction) seems to believe these people. In fact, the stock continues to move more negatively than the market.

I think the question is, is NTNX falling faster that its peer group, other Mid-cap fast growing SaaS companies? From the 52 week high peak NTNX has fallen more but after the initial post-earnings fall NTNX’s share price drop is in line which others in this apparent sector rotation.

1 Like

From what I understand the market reacted negatively toward the recent earnings release. And the reason I heard mentioned is the future forecast for not revenue growth but earnings. They are expecting lower earnings due to reinvesting in the business. If that’s all it is and unless something else is missing it seems like a buy opportunity given by this market due to current sentiment it has as a whole. Just another reason for people to “lock profits in” or what have you.

Agree Tinker. That has been the one thing that has kept me up at night with my extremely high allocation in NTNX. My best trades have always been when I’m in the contrarion camp, so it’s a bit uncomfortable to have so many posters in favor. Maybe we have a bit more to fall? Either way, I’m taking short, medium and extreme long trades here, so happy to wait it out if necessary.

Although, I would say that this drop has been a bit of a perfect storm. Misunderstood earnings, technical weakness, usual quarterly insider sales, Frame insider sales, competition FUD, earnings pushed out, profit taking, and sector rotation / market downturn. So I guess when you put it in that context, it makes some sense.

I believe one item that hasn’t been given enough mention, is the insider sales of Frame investors. I know it’s not THE cause, but I think it’s causing supply/demand issues that have been like an anchor on the price. There are 2.4m shares available for sale as of 9/24.

http://secfilings.nasdaq.com/filingFrameset.asp?FilingID=129…

I realize this may be slightly off topic, but I’m assuming a lot of Frame insiders and VCs took the opportunity to cash out after years of hard work. Now this doesn’t fully explain why institutions haven’t stepped in to drive the price back up, but may be a piece to the puzzle.

Stephen

5 Likes

Some financial backers are the ones that caused the sale to go through due to the immediate financial renumeration that would be coming their way. Meanwhile other VCs consented to selling out this early on Frame because they had confidence in in Nutanix’s shares in lieu of bringing Frame public eventually.

If these stories are true, then there is probably some large insider sales from some of these people, but not all.

What this reminds me of is Pure. Pure was just as cheap (relatively speaking) and thought of in similar positive ways. Then Pure did pop after one good earnings report. However, Pure has again fallen below where the initial pop was. With Pure becoming even cheaper than it before was.

Nutanix has experienced the same thing. Back in March, if you look at the chart, NTNX started to skyrocket when they announced going all software. Now the shares have fallen back to where they were before announcing the all software business model.

Sign that cheap stocks stay cheap? I do not know, I just found it very interesting to see both of this similar stocks do basically the same round trips. Whereas other, more “expensive” textbook wise stocks, although beaten down, have held much of their previous gains.

In the end it probably does not mean much other than textbook cheap stocks do tend to stay cheap. Given the rapid revenue growth of Pure and NTNX it may simply be a perceived lower CAP. Meaning that although they are doing great now the market has less confidence their business momentum is sustainable over a period of time.

That is of course not necessarily true, but I do believe that is how the market is treating both Pure and Nutanix at present.

Tinker

4 Likes

Seriously, look at the chart from last earnings report to now. It is a complete parabola with near identical slope going up post earnings to go down now. As if the earnings report never existed.

I really do think this has to do with perceived CAP (competitive advantage period). Gains do not stick as well in a stock with a lesser perceived CAP. Both Nutanix and Pure have many competitors and are competing in complicated markets with different technology architectures and paradigms competing for the same prize as well.

Neither company is simple, say like Mongo is (leading database, networking effect…, or Zscaler, two products, little competition, alternative technology paradigms are largely unnoticed as not serious at this point in time), or Square who is dominating in a very stable industry with enormous growth ahead and is clearly singular as a company.

Just a few examples of the difference between perceived high CAP vs. lower cap, and the market reactions appear to be rational given this perception.

True, I am subjectively assigning CAP, but I do not believe that there would be great disagreement as to the relative strength of the companies CAPs.

Something to think about I think when considering “over valued” vs. “cheap”. Of course, in the end, neither matters if the company performs long term when the market returns bullish. Just one reason why buying truly cheap stocks is something I avoid (always keeping in mind that there might be a rare exception from time to time).

One might consider it counterintuitive when one keeps a more concentrated portfolio, but I find textbook cheap to be a counter-indicator to risk/reward (Nutanix may be that exception as they are #1, clear advantages - they still have risk in the multi-cloud world where they are moving. Smorgasbord introduced us to a few concerns that I started to address last night. Thus the entrepreneurial risk that Nutanix is presently on-going).

Tinker

3 Likes

Although, I would say that this drop has been a bit of a perfect storm. Misunderstood earnings, technical weakness, usual quarterly insider sales, Frame insider sales, competition FUD, earnings pushed out, profit taking, and sector rotation / market downturn. So I guess when you put it in that context, it makes some sense.

I believe one item that hasn’t been given enough mention, is the insider sales of Frame investors. I know it’s not THE cause, but I think it’s causing supply/demand issues that have been like an anchor on the price. There are 2.4m shares available for sale as of 9/24.

I agree with the perfect storm scenario, being exacerbated by the Frame insider sale.

Relative to us current NTNX investors, all the Frame investors who are cashing out are most likely bemoaning the fact that it sat in the $50s for about 6 months up until cashout time, and is now low $40s/high $30s.

1 Like

Hi Tinker,

Re: CAP, I agree. With the caveat that I’m not sure the market, this board, or I completely understand the CAP of NTNX. I would argue that aside from NVDA, NTNX has more large greenfields than any other company in our universe (Xi, DaaS, Sherlock, Files, etc.). And with Pandey, it’s really hard to put a limit on their CAP or TAM right now. Most of these are 6-18 months out from producing significant revenue, but by IF some of these are fully realized, an EV of $6b will be tiny in comparison to their opportunity. And hey, maybe the 6-18 months out for their new products to produce significant revenue is part of the sell-off reasons.

Re: cheap is cheap. I beg to differ in regards to hyper-growth tech. In terms of non-hyper growth, I absolutely agree. But take TWLO and TTD for example. Just look at their 2017 / early 2018 charts and conversations. I think people were making very similar arguments (competition, retracing gains, FUD, too cheap, etc.). And then like coiled springs, the market woke up to the fact that these were not flash in the pan opportunities and rerated their multiples.

I’m not saying this will happen with NTNX (although for the record, I’m betting it does), my point is there are opportunities maybe once or twice a year, where hyper-growth meets value. These are my sweet spot opportunities, or as Buffet would say “fat pitch”. Doesn’t happen too often, but I think that’s what we have here with NTNX, where the company seems extremely misunderstood or under-valued, “cheap”, and then within 1-2 quarters it explodes upwards.

The big caveat here of course is that more often than not, it takes more time and patience than one wants. Anecdotally for myself, it usually happens the quarter AFTER the earnings report where “I’m sure it’s going to happen” and “the market has to wake up.” I’m sure there are some psychological/technical reasons for that. But it’s impossible to predict, and if I had to bet, Pandey is going to go all-in on this earnings conference call about how NTNX is undervalued. That, coupled with the GA of Xi and the Federal end-of-year spending boost, should provide some significant positive headlines that we’ve been lacking these last few weeks.

Either way, don’t over-allocate or invest more than you’re comfortable. It’s way more important to sleep well at night. But for the risk takers, I think this is a “fat pitch”. Now the question is when does the market wake up to it…if only I knew the answer…

Stephen

P.S. For the record, I sold off a significant amount of short-term options for SKX after earnings (luckily sold all between $30-32), and deployed a lot of capital this morning to MDB and TWLO. In regards to TWLO, it’s a pretty unique situation where a company pre-announced that they beat guidance and the stock still offered a great entry point. But, so be it.

P.S.S. I put this at the bottom because I know it is OT, but I trade a lot on horizontal support (said another way, where resistance becomes support). If you look at many of our best stocks, they retraced almost exactly to horizontal support on weekly charts (TWLO, AYX, NTNX, MDB, SQ). If these supports hold, these are textbook pullbacks on larger uptrends (minus NTNX, which is a much more complicated chart).

14 Likes

Oops, before anyone comments, I forgot about SQ in regards to greenfields / optionality. They too have a large amount of markets to expand into over the next few years.

In the end I agree with you Focus. In particular I have noticed similarities between Nutanix and Nvidia in regard to rapidly producing multiple different products at a pace that far outpaces the competition, with a quality that is better than the competition can muster, and with a visionary approach that produces practical products that seem common sense but only after the products are brought to market. Thus visionary…filling needs we did not even know we might have and delighting us in the process.

I just sometimes think too much and like to talk about such issues.

But I concur! So carry on. Gawd, it is only Tuesday! I literally thought it was Friday. Well good for me. No appointments scheduled for the rest of the week. I shall just have to find something else to do with my free time than question Nutanix. I pretty much have covered everything about the company and getting too esoteric in my examination at this point. Come on, esoteric, that’s my gig ;)!

Esoteric is actually bad for investing health. It causes fret. However naive esotericism, now there is a methodology for successful investing! Guilty! and certainly better than being the ultimate esoterics, insiders with key industry knowledge.

My examination is complete. Good to try the counter and then move on. Clearly, as I have spoken about in prior posts, there is nothing at all wrong with Nutanix.

Tinker

6 Likes

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.

27 Likes

Now, give me your 30 second elevator pitch on Nutanix.

Nutanix’s HCI makes it simple for an enterprise to setup and manage on-premise servers. They also have tools to help you manage both public cloud and on-premise servers via a single pane of glass, to support virtualized environment deployment (including desktops running on server), and to enable backup of your on-premise servers to a public cloud. Eventually, Nutanix will make it easy to move applications between private and public clouds so that you can balance cost savings, ease of programming, and load scalability with compliance and security needs.

I believe you can read that paragraph to someone in less than 30 seconds.

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Pretty good job Smorg. But you failed to make it clear why Nutanix does this any better or any different than their competitors. So, I’ll grant it’s a 30 second decent description, but not a compelling sales pitch.

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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.

There is a lot to be said for the uncertainty of the technology road map, but what cannot be said is that Nutanix does not have a competitive advantage. Nutanix remains #1 in the industry despite all the big players. VMWare, despite its enormous user base, and despite Dell servers to sell into, and Despite EMC, is still #2 (albeit by a statistical tie).

Dell owns VMWare. Yet…{dots for emphasis} Dell sells far more servers with Nutanix on them than they do with VMWare on them. Let that sink in. Dell makes money, lots of money, when VMWare sells a software product (far more lucrative than selling servers). Yet Dell is forced to servers with Nutanix on them because Nutanix sold servers is their #1 product, and it far outsells its other server products with VMWare or anyone else on them.

Further, outside of VMWare and Nutanix, the next best place marketshare is Cisco at 5%, HPE at 4.5%. There is no real competition other than VMWare. There are two horses and the also rans who stay in the market because they are largely hardware companies pushing their hardware.

But even at this, it is likely that Cisco sells as much if not more servers with Nutanix loaded on them (same with HPE) than with their own HCI products on them. I do not have the numbers for it, but this despite Cisco and HPE affirmatively marketing against this happening. I base this speculation on the Dell case. If Dell is forced to sell Nutanix because it is by far its leading product to sell over its own VMWare, just how successful are the 5% and 4.5% marketshare companies in selling their hardware without Nutanix “pirated” one their stuff (this is customers buying Cisco or HPE gear and manually installing Nutanix no it rather than the home brand).

Thus, the technology roadmap may be less than clear, but Nutanix’s competitive positioning is crystal clear. Like in so many other industries the big players (except for VMWare) lost their lunch to the industry pioneer. And even at this, it is clear that VMWare has many structural advantages in this market and despite this they are still #2 (even if statistically insignificant).

Tinker

4 Likes

Tinker, no argument, but you kind of missed my point.

You are addressing reality as related to the technology, I was addressing perception of the investment community. Even a lot of the so called analyst don’t dig very deeply. How many are actually aware that the bulk of Dell HCI sales are actually Nutanix sales hosted on their boxes? My guess (and I admit, it’s a guess) not all that many. So the perception is that there’s a lot of competition and it’s a sort of David and Goliath situation.

Perception constitutes reality, irrespective of the facts.

1 Like

But you failed to make it clear why Nutanix does this any better or any different than their competitors.

Don’t shift the goal posts, brittlerock. Your challenge was about understanding the company, not why it was better.

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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.

Hi Brittlerock,
I do say that I don’t need to to understand the technology, I just need to understand the numbers. But let me clarify what I mean. I mean that if revenue is growing 50% per year, the people who need the technology, and understand why they need it, are buying the technology in great gobs. So I don’t have to understand what hyper converged infrastructure actually is. I just have to understand that customers want it, and I get that information from reading the quarterly reports and investor presentations, and reading posts by smart guys like all of you.
Saul

27 Likes

Hi Smorgasbord. In your 30-second elevator pitch the only thing I couldn’t understand at all was:

“support virtualized environment deployment.”

Could you explain that a little further.

Thanks

Saul

1 Like