Updated Relative Valuations, and NTNX thoughts

Now that most all of the main companies we follow have released their earnings for 12/31 or 1/31 year ends, I wanted to update the relative valuation analysis I did a few weeks back, particularly given how some of our stocks have jumped (TTD, MDB) or fallen (NTNX) since earnings. I won’t rehash all of my thought process, but it’s essentially a simplified analysis to guesstimate 3 years of future growth rates, assume that the margin % will stay the same, and see how expensive they are relative to one another. Here’s the original post:


The primary change I made this time was to factor in the seasonality of these companies, by not annualizing the last quarter, but instead taking the actual last 12 months of results vs the comparative prior 12 months of results as of 12/31 (or 1/31 for the companies that have fiscal years/quarters that end in January instead of December). Also, I added SMAR to the analysis, although they don’t release 1/31 earnings until next week so I used the 12 months ended Oct 31 vs same period of the previous year for them.

Here’s what the data looks like, sorted by lowest price/margin:

	Latest 12mo R	Latest 12mo GM 	GM%    PY 12mo R   12mo growth	Market Cap	P/R	P/Margin
NTNX	    1,242 	    913 	74%    1,020 	        22%	 6,965 	        5.6 	 7.6 
NEWR	      446 	    373 	84%	 330 	        35%	 6,032 	       13.5 	 16.2 
DOCU	      701 	    509 	73%	 519 	        35%	 9,725 	       13.9 	 19.1 
TTD	      477 	    477 	100%	 308 	        55%	 9,177 	       19.2 	 19.2 
AYX	      233 	    210 	90%	 132 	        77%	 4,657 	       20.0 	 22.2 
SQ	    3,298 	  1,304 	40%    2,214 	        49%	32,476          9.8 	 24.9 
OKTA	      399 	    286 	72%	 257 	        56%	 9,153 	       22.9 	 32.0 
ESTC	      241 	    172 	72%	 138 	        75%	 5,995 	       24.9 	 34.8 
SMAR	      159 	    128 	81%	 98 	        62%	 4,690 	       29.6 	 36.6 
MDB	      256 	    183 	71%	 155 	        66%	 7,019 	       27.4 	 38.4 
SHOP	    1,073 	    596 	56%	 673 	        59%	23,038         21.5 	 38.6 
ZS	      243 	    195 	80%	 154 	        57%	 8,310 	       34.2 	 42.7 
TWLO	      650 	    349 	54%	 399 	        63%	16,066         24.7 	 46.0 

Not surprisingly, NTNX has the lowest Price/margin over the trailing 12 months since their growth is significantly lower than the other companies listed

and here is how my projected 3 year price/margin looks. Similar to my original post, I’m assuming here that each company’s growth rate slows by 5% per year in each of the next three years

	Annual Rev								
	Growth Decrease	Yr1Growth  Yr2Growth  Yr3Growth	  Yr1 Margin   Yr2 Margin   Yr3 Margin	Price/Yr3 Margin
AYX	      5%	     72%	67%	62%	     361 	   604 	       978 	 4.8 
NTNX	      5%	     17%	12%	7%	   1,065 	 1,190 	     1,269 	 5.5 
TTD	      5%	     50%	45%	40%	     715 	 1,036 	     1,449 	 6.3 
ESTC	      5%	     70%	65%	60%	     293 	   483 	       773 	 7.8 
NEWR	      5%	     30%	25%	20%	     486 	   607 	       729 	 8.3 
SQ	      5%	     44%	39%	34%	   1,877 	 2,608 	     3,493 	 9.3 
DOCU	      5%	     30%	25%	20%	     662 	   829 	       996 	 9.8 
MDB	      5%	     61%	56%	51%	     294 	   457 	       690 	 10.2 
OKTA	      5%	     51%	46%	41%	     431 	   627 	       882 	 10.4 
SMAR	      5%	     57%	52%	47%	     201 	   305 	       448 	 10.5 
SHOP	      5%	     54%	49%	44%	     921 	 1,375 	     1,986 	 11.6 
TWLO	      5%	     58%	53%	48%	     551 	   843 	     1,247 	 12.9 
ZS	      5%	     52%	47%	42%	     297 	   437 	       623 	 13.3 

Now one of the assumptions that makes this a bit misleading is that AYX in particular has the impact of ASC 606 adoption in the numbers above (using $89.2m for the quarter ended 12/31/18) which isn’t really apples to apples. If we use the comparable ASC 605 number for the quarter ($60.5 million), the the third year price/margin would be 8.4, which is more consistent with many of the other companies. Others might fall into this category of needing an ASC adjustment to make the comparison more fair, I’ll need to go back and double check.

Putting NTNX aside for the moment and making the adjustment to AYX, TTD comes out as the relatively least expensive company on the list, even after it’s big jump after earnings. And the projected growth rates aren’t too crazy (50%, 45%, and 40%), albeit still high compared to most “normal” companies.

Other observations aren’t too surprising, some of the companies that we already know are going to look expensive (e.g. ZS) show up at the bottom of the list (not that I’m suggesting it isn’t going to perform well from here, given the size of its TAM, just saying that a lot of expectations are already baked in. As Mongo showed this week, even very high expectations can always be surpassed).

I’m a little surprised that ESTC doesn’t come out as more expensive looking, but I suppose when you’re starting from such a low revenue base and factoring 60%+ growth for three years, that’s a lot.

On to NTNX. I have a large position in Nutanix, although obviously smaller now after the hit it took after earnings. I sold a tiny sliver last week to buy some AYX at $67, but otherwise have held on to the majority of my shares. Looking at the numbers above, estimating that they’ll get to about $1.25b of margin in three years if they only grow at 17%, 12% and 7%, I can’t help but think a) they are going to do a lot better than that growth-wise and b) all of that margin $ is going to be worth a lot, if not to shareholders than to another company looking to acquire them.

Alternatively, keeping NTNX overall growth rate and margin % the same as it was in the past 12 months, 22% growth per year would get their margins to $1.65 billion in three years, which is more than I’ve projected for any of the companies above except SQ and SHOP which are both already valued at $20B+. For NTNX currently with a market cap below $7 billion, that seems pretty appealing.

I feel like their 22% growth would not even factor in them “righting the ship”. It’s far from a worst case scenario, but I tend to think “just” 22% avg growth for three years would be considered pretty mediocre by management and many shareholders, yet I still think it would warrant a valuation well above where they stand today. If they were to truly right the ship with the new folks they’ve put in charge of revenue this week and get even close to something that would be considered hyper-growth, today’s valuation will seem like a steal. However, like most of you who have sold off your shares, I’m not going to put a high level of confidence into that happening right now.

Also, I don’t think we should completely discount the value of their being acquired at a premium. I fully agree with everyone here that has said we should never invest, or hold onto, a stock simply because we think there is a chance they could get acquired, but I would also disagree with anyone that suggests that that possibility shouldn’t at least be factored in a little bit to your thought process. It was only a couple months ago that the rumor was out there that Oracle was buying NTNX for $65/share. That could very well have just been a fake report, but I tend to think the likelihood of their being acquired at a decent premium, especially if they don’t get things moving solidly toward hyper growth in the next quarter or two, are significant.

So I’ve decided I’m holding onto the rest of my NTNX, which again is a pretty significant 10%+ of my portfolio. I’m not adding more right now, although I’ve got to think that if I didn’t own any currently, I would be seriously thinking about buying some. At the same time, I’m not trying to talk anyone that sold recently into repurchasing as there is definitely a high risk that they don’t execute going forward. And also, it might be a good strategy to just wait a quarter or two, even if you miss some upside if you believe they are back on track later this year, then you can always get back in then.




I like this effort you’ve put in to do this analysis. But some of the data is nuanced so one must be careful not use your outcome numbers other than as a general guide. Below are some things to consider. I can’t recall if you’ve already mentioned some of these points (didn’t go back and check):

  1. Revenue. You’re using revenue as a starting point. There are at least a few things to look out for here.

First, you already mentioned the accounting standards (ASC605 and ASC 606) which give different results due to revenue recognition differences. Along with this there are some companies, like TWLO, which have no deferred revenue, whereas as other companies which have collected large sums of dollars which have been piling up on the balance sheet as deferred revenue. ASC606 corrects some of this issue but it does not do so completely. Perhaps using calculated billings instead revenue would give something closer to apples to apples.

Second, some of the companies have a business model that require consulting/installation of the solution (AKA professional services revenue). Some of the companies (e.g. MDB I think) use partners for some of the consulting/installation so there is probably an additional difference there between the companies. Usually, this service is counted by the company as revenue even though these sums are VERY low, zero, or even negative margin. The companies break out the recurring/SaaS revenue from the professional services revenue. Wouldn’t it be wise to account for this in your analysis to get a clearer, more accurate view?

Third, some of the companies have 2 or more sources of revenue. SQ is probably the example where showing just the blended revenue is giving a really misleading outcome. This is because the sources of revenue are different and the growth rates and margin for each revenue type are also different. SQ should really be analyzed as two separate companies and then combined at the end. The services and subscription portion of SQ is recurring, high margin, and growing VERY fast while the revenue from SQ’s cut for the transactions used on their platform is not recurring, low margin, and slower growing. Not separating these out makes SQ look worse than it is (IMO).

  1. Gross Margin. I like the concept of using GM and GM dollars. But we have some similar issues as the ones pointed out in #1 (revenue) above. I think you are using a blended gross margin that includes the zero margin professional services. Also, some companies such as NTNX are in transition with the GMs increasing due to the shift to exclude passthrough hardware sales. Twilio, which has had a stable 54% GM, has stated that they are intentionally keeping this lower to gain customers. They said that they expect GMs to be about 1000 basis points higher in the long run. Clearly, if you consider this, TWLO will look like a better bargain. I already mentioned SQ’s bifurcated GMs.

  2. Growth rate. Related to the point that I made under revenue (#1 above) using a blended growth rate (including the professional services growth) will give a lower GM so companies that do not have professional services revenue will get penalized. I would just exclude the professional services revenue. Also (and I think this a VERY important point) some companies are displaying accelerating growth (e.g. TWLO and ZS), some are showing stable growth (e.g. AYX), and some are showing decelerating growth (e.g. SHOP). Clearly, if these trends persist, the companies with accelerating growth should have their value increased. By using a standard 5% annual growth decline, you are not adjusting for this important factor. The challenge is that what assumptions should one make to future changes in acceleration; this will be subjective but the use of a standard 5% annual decline is also subjective. I think that a company should be rewarded for acceleration until it shows that it is no longer accelerating. Similarly, a company this is decelerating should be penalized (or if you’re Saul it should be just sold).

Hopefully, my feedback is useful. Thanks again for posting your analysis.




Thanks for your comments and feedback. In short, I agree with everything you say.

When I did the original analysis a few months ago, I had initially tried to break out the recurring/SaaS revenue, but because each company discloses their breakout differently, I was going to have to make assumptions one way or another, and ultimately decided to keep it simple and take the total consolidated revenue and margin numbers, acknowledging that it could skew things, especially for certain companies. If anything, I tend to think it makes the outcome look a bit more conservative in most cases, so I was ok with that, although, you are right, it does impact comparability between the companies, and a more detailed, less simple, analysis should factor that in.

Similar thinking with the growth rate. I had mentioned in my first writeup a few weeks ago, that the companies that continue to show accelerating growth rates are likely to be the biggest winners here, regardless of what the numbers above show. However, I think most of these companies have the potential to see their growth accelerate, as MDB did this quarter, but I am not confident that I can predict which ones will ultimately do that, or who will do it the most and for the longest, so I put a consistent -5% on all of them.

In this case, my approach may not be conservative for all of them, but for some of them it will, especially for ones that are experiencing accelerating growth in the second half of the 12 month period just ended. I do play around with the numbers a bit in the spreadsheet to see how it looks if I reduce the future growth estimates for the companies that are on the high end 70%+ to make them a bit more conservative, but I’ve only posted the straight -5% version above. I can say that I didn’t come up with wildly difference relative valuations when I adjusted the rates, otherwise I would have probably added some commentary around anything I felt strongly enough that I had reason to believe their percentages would go one way or another, as I did with Nutanix above, using the assumption that they at least maintain +22%/year.

and to your first point, yes, I wouldn’t recommend anyone use this for anything other than a general guide. Ideally, doing this analysis would throw some strong signals at me saying I need to decrease my holdings of X and add to Y. That isn’t what I personally conclude here, as I think they all have great potential and are all more or less deserve the valuations they currently have. What is clear to me and shouldn’t be a big surprise, is that some have higher expectations built in than others, and that will help guide me as I track their future results against expectations later this year.