On Investing Styles and Nutanix

Investment Analysis Clubs Saul’s Investing Discussions
#2

They want to be the operating system of the cloud

Bingo Stephen - this is exactly why I am so interested in them and sticking with them. Not only do they have that vision and have called it out before they measure their TAM by that ($172Bn) and they are building their offerings out in that direction. It’s the reason why I am not worried about them losing focus on HCI - because they are going after a much bigger prize.

I’ve said it before and will say it again - there are probably 2 opportunities that if achievable are probably the 2 most significant investments we could make.

  1. The de-facto operating system for the cloud - particularly if that includes IOT
    and
  2. The de-facto operating system for AI

If anyone can achieve a Microsoft O/S + Office monopoly in these areas, it’s a trillion dollar business no question.

Ant

18 Likes
#3

Stephen,
Thanks for the post. You have confirmed much of my own thinking, but I must admit when both Bear and Saul reported that they have abandoned NTNX it gave me pause. I have deep respect for those two guys who have far more investing experience than I.

Nevertheless, NTNX has an incredible visions and they appear to be executing on it. There is no doubt that the bulk of the IT world is moving to a hybrid cloud. And there is no doubt that the IT world is continuing to expand. Virtually every company of any significance now has a digital strategy and most often that strategy is either 100% cloud or hybrid cloud. Even small shops are shunning the 100% internal data center concept. I expect the customer base for Xi to grow in an unprecedented fashion. The product more or less erases the boundary between the external cloud and the internal IT shop from an administrative point of view, that’s huge. To date, resource allocation decisions of this sort have been largely seat-of-the-pants rather than based on solid information. Xi changes that.

OTOH, there is that 6 - 18 month waiting period you referred to. Which may actually be somewhat longer as adoption rates are difficult to predict. So, what to do?

I’ve been wanting to up my allocation in TTD. I bailed out of a starter position a while ago for no other reason than it was new, I was not too familiar with the company and my confidence was low. I felt the funds would be better invested elsewhere. I rather regret my impulsiveness on that, but was at a loss regarding what to sell in order to increase a tiny TTD position I reinitiated not long ago. I plan to sell maybe as much as half of my NTNX (currently about 9% of my overall portfolio) and buy TTD with the proceeds. I’ll watch this, as I watch everything in my rather concentrated portfolio. I’ve learned that it’s never to late to reconsider an investment decision.

5 Likes
#4

Stephen - Great post.
On OS of the cloud, keep in mind that AWS is the 800lb gorilla and at reinvent conference this week, they pretty much declared that they want to own hybrid/ enterprise cloud as well.

How do you account for this challenge to NTNX.

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#5

If you look at the investor presentation, non portable software sales creates no deferred revenue. Software subscriptions do. In fact $67 of the $70 milllion in growth in deferred revenue was software subscriptions.

So it would make sense, as they transition to a software subscription model, they software subscription revenue would skyrocket, as it has, and was said that we shouldn’t be overly excited over 100% growth in subscription revenue because it is just cannibalization. At the same time as they transition to a business model from one that does not generate deferred revenue to one that does, we should not be overly excited about deferred revenue growth over a small base.

I am concerned over a slowdown in revenue growth over the next few quarters due to their shift in business model from large one time software sales to small recurring sales.

I am contemplating whether or not to ride it out because these are the times we can see large falls after earnings but as you mention the opportunity is huge.

It’s 6% of my portfolio. So I’m not going to lose sleep over it no matter what. And don’t need any more of my higher conviction positions. So for the time being it stays.

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#6

Hi Nilvest,

There are many on this board more technically advanced, so I will defer any comments on the technical details.

But at a high-level, as I see it, this market is a bit like the wild west. Most companies are both competitors and collaborators in different areas (on a side note, in the previous link Sunil Potti talks about NTNX’s Google Cloud partnership briefly, and if you can extrapolate, seems like there are some really interesting opportunities there.)

On Amazon’s announcement of Outposts with Vmware:

  1. To me, this validates NTNX’s vision / model. It means Amazon wants to go where NTNX has said its going for awhile now.

  2. This offering won’t move to GA until back half of next year, so most likely 9-12 months from now. Hence, NTNX has a nice head start with all its hybrid cloud offerings.

  3. As much as Amazon can create a hybrid solution, I’m sure many will worry about vendor lock-in. One of NTNX’s selling points is that it is Switzerland. It even works with Vmware installs. As Dreamer has pointed out though, the reality of that statement is somewhat of a work in progress.

  4. Innovation will win the day. In my opinion NTNX is attacking on so many important fronts at once: DaaS, edge / IOT, backup recovery, storage, etc., it will be hard to catch up. If they can build what they say they want to build, it will be very difficult for others to reproduce the depth of offerings and holsitic, “one-click” os. But again, a lot of this is currently a vision and not proven reality. Yet…

Just my thoughts.

12 Likes
#7

I’m blessed and cursed with both more patience and less concentration than Saul, Bear, Tinker, et al.

While I enjoy the focus required of this strategy – for my own portfolio and choices – and the education from this board, my investment choices are my own.

So are yours.

e.g., Dreamer put me on TTD early and IQ later. I’ve bought into TTD a few times, IQ only once.

Reading and learning from this board has opened my mind to new strategies – there are many strategies.

I’m still holding a bit of my original NFLX, expecting another double from here. That doesn’t fit with the folks here, but it fits for me.

YMMV.

-kiplin

1 Like
#8

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

This is why I doubt them. They can’t sell their stuff.

You say you see “a lot of energy” in that video, probably because that’s the only thing you can interpret. You may think that it’s just tech speak, tech people understand it and that’s what’s important but that’s not quite true.

  1. I am a tech person roughly in the right area of expertise and I have a hard time following him. You can feel the confusion from the interviewers who go through the set of questions they’d prepared but don’t engage him on his answers really. The NTNX guy starts off well, saying how they want to take their customers on a journey through their portfolio of products, but then doesn’t actually go through the journey but instead quickly devolves into indecipherable jargon. Similarly at about 7:50 mark he talks about their “Test Drive” tool intended to have customers take a taste of Nutanix and see how it fits. Great jumping off point. The next thing that comes out of his mouth is: “We’ve proven that AHV can run in a nested virtualization mode on GCP natively and can co-locate with the rest of GCP services”; and you can feel the interviewer’s eyes glaze over and the next question is totally unrelated to Test Drive. I really don’t think this guy is a good spokesperson for NTNX.

  2. They never explain why you should be choosing Nutanix. Remember how TWLO bragged that a customer has been able to set up their call center with just one engineer, two interns and a dog? That’s what NTNX needs to be doing! They do it in this video: https://www.youtube.com/watch?v=cI3NIgjEDIc but they always fail do deliver the message in interviews. When Dheeraj was asked what the use case for choosing Nutanix was did he say “to decrease the deployment time of your data centers tenfold” or “virtualize your network infrastructure to be able to change it with a click of a button and save 50% on engineering”? No, he said it’s for “de-platforming your data center”. I mean, there are some tech people who will understand what that means but they really need to convince the managers to do this and be able to get rid of some of their tech staff. I’m not going to go to my boss arguing for a technology that will replace me…

31 Likes
#9

This is why I doubt them. They can’t sell their stuff.

Products have features but customers want benefits. Not a topic for this board but

Radio Commercials - Don’t Sell Features OR Benefits
https://www.youtube.com/watch?v=re8r71XQuPw

don’t sell features
https://www.google.com/search?client=safari&rls=en&q…

I got professional sales training at IBM, NCR, in insurance, and in Silicon Valley. It’s quite an art.

Denny Schlesinger

2 Likes
#10

2) The de-facto operating system for AI

If anyone can achieve a Microsoft O/S + Office monopoly in these areas, it’s a trillion dollar business no question.

Ant

Wintel was a hardware/software duopoly. Can Nutanix/Nvidia achieve such a status?

Following up on my previous features/benefits post, this is what Yahoo has to say about Nutanix

Description

Nutanix, Inc., together with its subsidiaries, develops and provides an enterprise cloud platform in North America, Europe, the Asia Pacific, the Middle East, Latin America, and Africa. Its solution addresses a range of workloads, including enterprise applications, databases, virtual desktop infrastructure, unified communications, and big data analytics. The company offers Acropolis, an open platform comprising hyperconvergence, native virtualization, enterprise storage, virtual networking, and platform services; and Prism, an end-to-end consumer-grade management plane providing management and analytics across its software products and services. It also provides Nutanix Calm that offers native application orchestration, automation, and lifecycle management to its enterprise cloud platform. In addition, the company offers Beam, a multi-cloud optimization service; and Frame, a desktop-as-a-service. It serves customers in a range of industries, including automotive, consumer goods, education, energy, financial services, healthcare, manufacturing, media, public sector, retail, technology, and telecommunications, as well as service providers. The company was founded in 2009 and is headquartered in San Jose, California.

https://finance.yahoo.com/quote/NTNX/profile?p=NTNX

Not a single benefit, just a list of features. Not being tech savvy in this area I don’t have a clue why someone would want to buy the stuff. Since my “investing style” is based on the business model the above mumbo-jumbo keeps me from investing in this company. In high tech I stick to basics I understand, parallel storge – PSTG, database – MDB, supercomputing – NVDA, and to a lesser extent dataflow – ANET. No doubt I’m missing a lot of nuggets but if I can’t recognize them… well…

Denny Schlesinger

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#11

Denny is spot on.

Nutanix has a big marketing problem. They get so caught up in the tech that they miss out on the messaging. It is a big issue on the conference calls too. They are clearly excited about the tech and opportunity but miss the chance to look at it from the outside perspective

It doesn’t pass the ‘can I explain it to my wife / mother’ test at all, unlike TWLO / TTD / SQ / SHOP /MDB etc

I think they will eventually overcome this, but from the top down, they need to re-architect their message. Simplicity is an underrated skill to the technologically inclined.

I hold a position, but I am less inclined to fiddle with my portfolio unless my investing thesis changes. I know a few NHS hospitals (my work environment) are increasing their use of NTNX, so I think the future is bright.

1 Like
#12

Here’s a nutanix analyst report from RBC if you are interested

https://www.rbcinsight.com/WM/share/ResearchViewer/?YYY340_a…

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#13

You may think that it’s just tech speak, tech people understand it and that’s what’s important but that’s not quite true.

They have grown customers from 2140 to 11490 in last 3 years
Cumulative global 2000 customers growth 250 to 720

Clearly their customers seem to understand what they are doing. Maybe not the investors.

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#14

Stenlis,

I certainly agree, PR / Marketing is one of their biggest issues. They are a tech-driven company led by a technical founder. Dheeraj is very honest, but he does tend to ramble and often gives answers that go way over peoples’ heads. They need to solve this problem and learn how to sell themselves better to wall street.

The good news is that this is fixable. And doesn’t seem to be negatively impacting sales or NPS scores. And the uncertainty may cause an opportunity for investors. Just look at how many analysts and fool members who think it’s too confusing.

For the record, Saul, Dreamer, and Bear are brilliant investors and I don’t feel good about betting against them. Don’t get me wrong, I have many concerns with NTNX too. But I also have concerns with AYX, TTD, TWLO, and ZS (which are also currently holdings of mine). Yet NTNX is simply not priced or regarded like a SaaS company, or at leadt one that it is not going to keep growing at a rapid pace. I believe the risk/reward is very strong. Again, it comes down to investment styles. I take valuations and trading ranges into account. And I often like to overallocate when I believe the market is not valuing a hyper-growth company properly. Remember, many on this board sold out of TWLO and TTD in 2017 when the story changed, or competitive fears or perceived risks grew. And that is fine. I understand the reasoning. NTNX might trade sideways for a quarter or two. But I am okay waiting for this story to play out because I think the reward may be worth it.

Stephen

24 Likes
#15

Thanks Stephen.

This discussion reminds me of Elon Musk’s quote - something in line of - in today’s time, competitive edge comes from rapidly delivering innovations at scale.

And that’s what we see with companies like SQ, TWLO, SHOP etc. (I am a big fan of SQ… and slowly seeing TWLO in the same light)

So far I did not put NTNX in that category but you make a very compelling argument for that.

Thanks again.
Nilvest

#16

"I understand the reasoning. NTNX might trade sideways for a quarter or two. But I am okay waiting for this story to play out because I think the reward may be worth it.

Stephen"

And this is exactly how it should be. Saul says not to try and mirror him. He has provided a forum that gives pro and con in great analysis from all sides. It is up to each of us to determine what positions to invest in. This is the best part of his guidance in teaching us to fish on our own.

Rob

6 Likes
#17

This video is a great example of the problem

Cranmer has his critics, but his pitch for Nutanix was far more understandable to the average retail investor than Pandey’s

https://youtu.be/_8L6P6axHCA

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#18

I would say that one need a self-consistent process in making decisions. Through the volatility and the uncertainty, one ought to see a guiding line and have the conviction to follow it through. Changing your mind midway is fine sometimes but if you do that too often or all the time then you do not have a self-consistent process and that will affect your results in a bad way.

The other thing is timeframe. Most here discuss ‘better places to put their money’ in the shorter term. There are some ways to catch the wave of the moment and from time to time you can ride it to shore but sometimes it does not make it and fizzles. If your start time and end time is too short, it can be quite random and success can be momentary. It is hard to make it in a consistent manner trying to guess the short term. I think many here are not that short term but still they think in the timeframe of one or too or at most a few quarters. They inspect the quarterly report closely and at the slight indication that growth is slowing, they will start to lighten or simply just unload immediately. There is no ‘let’s see how the next few quarters will unfold’. The action is immediate. Sometimes that is not good if the results and the capturing of the position in the market require more much more time. Patience is not just holding for a few quarters. Patience is about seeing things through in the larger scheme.
Many here go in and out fairly quickly. It is a way. I guess. It seems to me to be quite hard and quite taxing. But some do it and apparently do it well.

About diversification vs worstification…the ultimate is that you have all your money in one Company. That is not that uncommon when you think people start Companies and put all their money in their Company. It is a bit different than putting all of it in a publicly traded stock. If you are doing your own Company you could have more control and understanding of what it is all about. For a public Company, you never can know what really is going on and some of that can be quite consequential to the fate of the business. So diversification is for when you don’t know. The term ‘risk’ lumps all of that in. Even if you have the grand vision and the execution, there always could be something you have not considered coming from left field to mix it up. But at the least you feel more conviction when you are the one who built it from the ground up.
Apparently 10 to 15 publicly traded stocks could be enough to diversify your portfolio. That coupled with a process that works for you is the key for success.

tj

1 Like
#19

"1) The de-facto operating system for the cloud - particularly if that includes IOT
and
2) The de-facto operating system for AI

If anyone can achieve a Microsoft O/S + Office monopoly in these areas, it’s a trillion dollar business no question. "

and what is the timeframe from seeing this in the numbers? how would that unfold in time, do you think?

tj

#20

Saul, Dreamer, and Bear are brilliant investors

You meant this as a compliment, but this is really a stretch.
I can’t stress enough I am just a guy on the internet, and I have no where near the experience (and success rate) of Saul. I do not know Bear’s track record as well as Saul’s, but guessing the same applies to him also.

If you like my ideas/thoughts, and find them helpful, great! I don’t think everyone can write arguments as equally as others. Meaning: if poster A, B, C, and D (for Dreamer) are equally intelligent and have equally well-intentioned/well-thought out views on why Stock X will go up or down, but poster D just does a better job at writing his thoughts, then you may be getting a skewed data set to base your decisions on.

It is true I have had a pretty good year. I traded too much, to be sure, but had personal reasons for doing so as I wanted to hit an arbitrary goal so I could take money out for some house stuff and not feel too bad about it. Outside of May, most of June, and August, I didn’t light the world on fire. At various points I have looked at or talked about or even invested in stocks only to discard them like broken toys a few days or weeks later. (NOC, DIS anyone?)

My crystal ball wasn’t good enough to see trade war coming along to crush China ADRs such as IQ/BZUN. I did get lucky, or perhaps just have a good gut, and sold for gains as a whole.

I recently backed the truck up on NVDA, only to have mgmt utterly let me down.

Point is, I have lots of ideas. Hopefully more are good than bad. But I wouldn’t say I am a brilliant investor. I think I do an ok job on being able to dig in and learn about a topic or stock, and maybe that is what comes through on some posts.

For certain stocks, like Arista or Nutanix, I have had stronger opinions due to my work/career in the IT DC sales space. I think it is easier to sometimes be more critical when you are closer to the actual businesses of stocks you follow. Saul has the advantage here of not worrying about being an expert on technical specifics and instead letting the numbers prove out if the company is doing well or not. That and he stays informed and takes in input/recommendations from sources he has grown to trust. So take my NTNX comments with a grain of salt…I am probably too close to it.

I often use this analogy that you get on an elevator and two guys are talking and one is very enthusiastic (and appears sincere) about how “stock ABC is just going to blow up - I am betting the farm!”. It is human nature that many of us can’t help but look up that stock when we get off the elevator. Why? Why?! It was literally some random guy on the elevator!

So - please remember…I am just a guy on the internet. :slight_smile:

Dreamer

46 Likes
#21

Well, when you say this is a great example of the problem, wasn’t sure if you meant the fact that Cramer talks like a freight train or couldn’t really understand what the CEO was talking about.

Regardless, I sold out today completely as have been reducing for the last few months and allocating elsewhere including cash. Mainly like Saul, I really don’t understand all the complexities here, its just not straightforward, but also nervous for what comes out of Trumps mouth these days, in particular, this weekend’s meeting, so want to have some powder dry just in case and either add to existing Companies or just have ammo when really needed.

Long term,(2-3 years) ntnx could double or triple and those holding I hope so, just moving on myself.
Regardless, like Shop, can always revisit at a later stage.