As most of you know, I have been critical of PVTL despite being an owner of the stock (small % of portfolio for those reasons) and the recent 20% hit in stock price has essentially wiped out all my gains in this stock.
I usually don’t act impulsively after either rapid gains or declines in stocks and prefer to assess the best approach after a few days of contemplation. For example, I have previous posted on the 3 day rule as suggested by Putnid…but this post is less about 3 days and more about the theory behind a technology investment in a stock like PVTL.
I am not referring to the investment thesis espoused by Saul that the transition away from service to subscription would unlock the “value” in its share price. IMO, that theory remains perfectly intact.
Also still intact were the problems with this company that I posted about including the decelerating customer growth numbers, the concentrated enterprise level customer, the long sales cycle and the tangled web of confusion about how PVTL fits into the rapid tech change:
http://discussion.fool.com/pvtl-the-tangled-web-we-weave-3313484…
So these issues, both good and bad, were all known before the recent earnings call debacle…note I believe they did a reasonable job re-accelerating customer growth.
Unlike many here who keep their stock moves private before they act, I am telling you what I am going to do on Monday with my PVTL shares.
But first, please allow me to explain how I view high tech investing…and this is largely based on the experience of the late 90’s and the Y2K crash. Post crash, we had numerous investors who tried to understand how they could have improved returns in those later years. One such investor, Buckley, came to the conclusion that despite all the hype and allure of technology’s promises, the time to fruition of those promises was much slower than expected…he joked to take what these companies said the timeframe was, double that and then of course double that a couple more times…would come in just about “right on time”…that MUCH extended timeframe.
That sure was true then…and it is true now…one such recent example…autonomous driving…I made a great deal of money on MBLY (sold to INTC) and recently with NVDA that had touted autonomous…have you looked over that portion of its revenue growth lately??..…laggard by far for sure…fortunately NVDA had data and gaming to grow revenues. There is NO doubt the Buckley rule is in play for autonomous revenue…must move the timeframe out further to adoption…further out than most believe.
The Duma Rule was an extension of that Buckley rule with the strategy to translate these adoption timing events into an investable guideline or framework:
http://discussion.fool.com/the-duma-rule-20598973.aspx
The technology Adoption LifeCycle (TALC) for any company rarely (if ever) tracks the Stock Adoption LifeCycle (SALC) particularly early in the adoption of any technology.
The high return investment may be made by:
1) Being early in the SALC but before the reality of the TALC (Buckley Rule) in most companies.
2) Being later in the SALC after the disillusionment of the slowness of the Buckley Rule becomes evident but for which there is compelling reason that the adoption will yet occur (post bubble burst).
3) Being later in the TALC when it is much more clear that the technology is being truly adopted by the pragmatists
Understanding these three elements can assist in reducing risk and improving returns.
IMO, whenever one considers buying/selling/holding a tech stock, one should consider the balance between TALC and SALC in the above manner. All three scenarios can make money but transitions between the three can be bloody.
Many of the stocks discussed on the NPI are stage 1 companies…it is “new paradigm” after all and we have been blessed over the years to have some really capable people to ferret these early companies out (Tinker, Denny, Mauser, Ant, etc. and Dreamer recently). Here at Saul’s, whether you realize it or not, a large portion of your portfolios have become these same stage 1 stocks (typically no earnings but growing revenue at massive pace with large reported “claims” of massive TAM’s, etc.).
These are the “dreamer stocks” where massive stock gains can be obtained because they trade on hype, future promise…dreams of what they could become. I haven’t looked at what Saul holds in a while but when I last looked, at least 50% of his stocks made no profit. His returns speak for themselves so this is not being critical…just an observation.
The greatest returns in the medium term very often occur BEFORE a company has profits…as the company is expanding its footprint. During that period of time, investors are free to WILDLY speculate on what FUTURE profits might be but are NOT CONSTRAINED with what profits actually are. So the investors’ imagination often drives stock prices up and very often beyond any rational explanation…TSLA is the prime example of this.
But then one day, a company is no longer a “dreamer” and analysts start asking, and expecting, information on earnings, profit, margins, debt, etc…the stock moves into a reality phase and no longer driven by “imagination”…just stark reality…an example of this recently being ANET. During that transition from Stage 1 to Stage 2, the stock can get killed or languish because the dreamer days are more often over…no longer based on wildly speculative TAM’s, etc.
IMO, despite the fact that every stock will eventually have a “rubber meets the road” moment of earnings…this transition point is when I personally like to exit high technology because stock appreciation is more challenging during that transition. Surely you have seen how nimble Saul has been with these stocks and readily jettisons stocks slowing growth to “only” 50%+…….50% revenue growth and he sells it. He is in fact practicing what I have suggested above as a framework for high tech stock investing.
Keep in mind that later, in this natural history of TALC/SALC interplay, once earnings are more established, it is often safer to return to those same stocks once the rubber has been treaded all over the imagination…I have made a great deal of money with retreads…holdovers from NPI years past wherein the previous analysis was spot on, but the fruits were delayed until later (ARMHY and ISRG are the classic examples).
So circle back to PVTL and considering this tech investing framework described above…what should I do? When the Duma Rule meets this PVTL earnings call.
Up to that earnings call, one still saw hype, hope, huge TAM, “the war is over” commentary, true growth of subscription is being unlocked, etc…all lingo one sees with Stage 1 tech stocks.
Unfortunately at the earnings call…we got a cat and mouse game…….“uhm….why aren’t you telling us what we are used to see in financial metrics from past quarters??”……“well, we want to use this new one instead because we think it better reflects our business…but we aren’t gonna tell you what it was last year”. “Uhm……what revenue does PVTL actually get from this PKS partnership with Dell/VMW??”…….“uhm……we are not reporting that”. “Uhm….how many new logos did you acquire??”…“uhm……we define a new customer the way we want so you will have to speculate what else we have”.
It was a cat and mouse game and very disappointing…….that results in even more skepticism from the investment community as they seem to lose the dream, the speculation about that $50 Billion TAM…essentially, transformed into what is PVTL hiding??..…skepticism has overtaken the dream.
This is exactly the behavior tech stocks make when the rubber meets the road…exactly when stock prices tend to wane.
With that dream shattered for now…tell me, with their long sales cycles…what news will reignite the dream until next earnings?? Tell me with the PKS relationship with Dell/VMW………will PVTL get the lion’s share of that revenue against the parent Dell??? Tell me, with the stock lockup expiring 10/17/18 of 37 million shares…what holds the PVTL value leading into that expiration??..…tell me, with the requirement for enterprise level customers…how do they really ramp customer counts when they restrict the definition to some arbitrary revenue amount at that moment??
In short…what reignites the dream…the wild speculation??
IMO, that earnings call was a disaster…they dashed the dream…they played cat and mouse…they made us doubt their honesty…they changed the financial metric that allowed us to gauge their progress from last year…….they moved off Stage 1 to making the investor disillusioned that they are not making progress, that sales cycles are very long, that Dell will take the profits from PKS, etc.
The Duma Rule has met Cat and Mouse…and it didn’t like it!
BTW, not my prediction here, I bought more NTNX today!