On Investing Styles
I’ve been investing for 20 years, got serious about it 10 years ago, and have been more or less full-time investing for income for 3 years (in addition to other real estate / entrepreneurial ventures). It’s taken me every bit of those 20 years to realize an extremely obvious, but important point. Every investor needs to determine their own particular style of investing.
I know this sounds obvious or cliché, but this point gets lost constantly. Aside from learning fundamentals, every aspiring investor should really view their early years as a means to explore and experiment in determining their particular risk tolerance, interests, holding period, allocation, etc.
And there is no “right” way. The Motely fool recommends 15 stocks for buy and hold. Saul uses a savant-like intuition to dip in and out of hyper-growth companies like a Nascar driver going 200mph. Hell, Tinker sometimes invests in only 2 companies.
The point is, you can’t copy someone else’s style. This leads to frustration, stress, and bad decisions. Not to mention, you can’t reproduce the results long-term.
That said, a bad stock is a bad stock. And a good company, held over time (e.g. AMZN), should produce long-term alpha and tax benefits. But that is boring to me. And I’m seeking extraordinary returns, fully understanding this will bring added stress, research, and risk-taking. I employ an 80/20 allocation: 80% is a concentrated portfolio of hyper-growth equities (usually 5-10), and a 20% trading portion (using options, TA, and trading ranges of companies I study well). I usually funnel the profits from the trading portion into the equity portion and/or take out cash once or twice a year as needed. I’m relatively young, with a diverse set of passive income, so I can handle the risk. And moreso, I love the game! I wake up almost every day excited to learn more about my companies and industries.
What does all that have to do with NTNX?
Well, we’ve discussed this company back and forth over the last few months. At this point, it comes down to investing style. I don’t think anyone on this board is arguing that NTNX is a bad investment, only that there are potentially better investments with less uncertainty.
For me, in my equities-only portion of my portfolio (80%), I like to invest in founder-led, hyper-growth companies that have a large sector/market tailwind (it’s a huge bonus when they have hidden growth or innovation pipelines that the market may not be recognizing).
I’m also a huge believer in trading ranges based on valuations (and yes, vertical TA support/resistance levels). Tom E. (TMF1000) has written extensively on the subject of trading ranges using historical valuations, and currently has an ambitious project addressing this idea (on a side note, if you haven’t read his writing, I highly recommend, as he is one of the smartest minds on MF).
Sometimes hyper-growth companies present asymmetrical risk/reward opportunities because of short or medium-term perceived risk. These are the type of opportunities which are most attractive to my investing style. I don’t know exactly why? Maybe it provides me a bit more comfort in terms of a floor price? Maybe I like seeing things that the market is missing? Maybe I enjoy using TA and trading ranges to juice my returns? I can’t say exactly, but I can say that more often than not I’ve been very successful in these areas (TTD, TWLO, ANET all come to mind in the last few years, along with some other cash-flow producing companies: KORS, FOSL, SBUX, etc.). But again, this is my style. I’m happy waiting 6-18 months to be proven correct (or proven wrong). I enjoy hitting home runs. And make no mistake, NTNX is a potential home run. It could also be a huge miss. But I believe the risk/reward is in our favor.
Since the conference call, I watched a number of interviews from the .NEXT conference in London. You can check them out here if you want to geek out (for anyone with a technical interest, I really enjoy listening to Sunil Potti, who is there Chief Product and Development Officer, and probably should be their spokesperson): https://www.youtube.com/watch?v=shKS7_TwfZ0
You can feel the energy with NTNX, it’s exciting and contagious. And their ambitions are ENORMOUS. They want to be the operating system of the cloud (assuming that almost every org is moving toward hybrid/enterprise cloud). I remember reading or hearing an explanation from Dheeraj (CEO) at one point, that said something to the effect of, it’s like we’re attempting to build the operating system for the iPhone, in order to get people to understand what is truly possible, we need to build a few apps (like Apple did with maps or stocks or Weather), so people understand what is possible and enjoy using it. Ultimately that is why we are building so many new products.
DreamerDad did a recent write up of his views/risks which I thought was great, and I believe he would agree, if NTNX pulls off what they are aiming to do this could easily be a 10x opportunity in 5-10 years. At the same time, they may not succeed. There is unknown. There are less unknowns with other companies we follow.
But this is where my bet end up coming down to people. I believe in their management team. They are the fastest technology company in the last 20 years to $1B in revenue. Read that sentence again. They are innovating at an extreme pace. One of my favorite quotes from the interviews was from Frame’s co-founder (the Desktop-as-a-Service company), which NTNX recently acquired. He said something along the lines of I’ve been working in the startup world for a long-time, for the last 6 years we’ve built Frame from nothing into a huge company with rapid innovation, and I was shocked when I came to NTNX that the pace of innovation actually increased. We are working faster to develop new ideas than at the smaller startup.
When I hear things like that, I smile. It gives me confidence that NTNX will simply out-innovate, out-maneuver larger competitors. I always had/have the same feeling about Jeff Green (TTD), Jeff Lawson (TWLO), and Jayshree Ullal (ANET). To note, I did sell out of ANET around the same time as many here, as I felt their growth was going to slow, and they would stagnant for awhile with limited upside (whereas TTD and TWLO have continued to be two of my largest holdings).
At the end of the day, I don’t know if NTNX will ultimately reach their ambitious goals. Or if their management team will be as successful as they have been to-date, navigating a larger ship in a more crowded sea. But I feel confident in a few things:
- The HCI market is in the early innings, and will have tailwinds for the next few years (expected to grow 40%+ YOY)
- NTNX has hidden growth, similar to TWLO, whereas headline revenue numbers are misleading and temporarily suppressed while the 4 quarter comps work themselves out. For NTNX, many people see 13 or 17% revenue growth, whereas it should be 40%+ revenue growth. But in 2 quarters, it will suddenly magically seem as if growth “dramatically reaccelerated” to 40%+.
- Deferred revenue is growing 70%+ YOY
- NTNX is adding customers like crazy 800-1000 a quarter. Each customer spends 4x their original spend within 18 months. Smarter minds than mine can do the math, but they have a lot of new customers.
- NTNX has an array of new products that will slowly start contributing to revenue and capitalizing on their growing customer base. It won’t appear meaningful at first, but it should grow, especially Frame and Xi Cloud Services.
- NTNX will exceed $3B in billings by fiscal 2021. If they do so, that should provide at least a 2x return within 2-3 years.
And if they do succeed in becoming the OS of the enterprise/hybrid cloud, look out. Based on my particular investing style, this is a bet I think is worth making, and a fun ride I want to take with NTNX!
All that being said, I can change my mind on a dime if I feel the story has changed. And it may. I just don’t think the NTNX story has changed yet. And so long as I feel confident they will hit $3B+ in billings, with an undervalued EV/S, and a huge runway in various new markets (DaaS, Xi Leap, etc.), I will keep holding.