Cloud computing stocks can be great growth plays, but they can also quickly collapse on concerns about slowing sales growth, widening losses, and lofty valuations. That's exactly what happened to two recent cloud IPOs -- Twilio (NYSE:TWLO) and Nutanix (NASDAQ:NTNX).
Twilio went public at $15 per share last June, soared to nearly $70 three months later, then fell back to the mid-$20s. Nutanix went public at $16 per share last September, peaked in the mid-$40s in early October, then stumbled back to the mid-teens.
Let's discuss what happened to these two recent IPOs, and whether or not investors should consider them potential turnaround plays at current prices.
What do Twilio and Nutanix do?
Twilio's cloud service delivers voice calls, SMS messages, videos, and other content for mobile apps. If developers want users to call or text each other from within their apps, they subscribe to Twilio's service and integrate its API into their apps. This is generally cheaper and more scalable than creating comparable features from scratch.
Facebook (NASDAQ:FB), for example, uses Twilio's API to enable WhatsApp and Messenger users to add other users via phone numbers. Twilio has also been gradually adding additional video, security, and enterprise administration features to this platform to boost its revenues per user.
Nutanix is the market leader in hyper-converged infrastructure (HCI) appliances and software-defined storage solutions. These products bundle traditional silos of server, storage, networking, virtualization, and data center management into a single turnkey solution.
Nutanix claims that collapsing all those product categories into a single "converged" enterprise cloud platform will gradually make data center infrastructure "invisible." This can be a cost-effective solution for younger companies which haven't installed on-site infrastructure yet, and it can help older companies pivot away from on-site private cloud models toward more flexible "hybrid" cloud models that straddle both the private and public clouds.
How fast are Twilio and Nutanix growing?
Twilio's sales surged 66% to $277.3 million in fiscal 2016. Its "base" revenue -- which excludes revenue from "Variable Customer Accounts" (large customers which haven't signed 12-month minimum revenue commitment contracts) jumped 79% to $245.5 million.
However, Twilio expects just 28%-31% sales growth this year, partly due to waning business from its top customer, Uber. During its first quarter earnings report, Twilio disclosed that Uber -- which contributed 12% of Twilio's sales during the period -- plans to use other internal or third-party platforms for its calls and texts in the future.
That bombshell caused Twilio shares to plummet 26% on May 3. That development was also troubling because another Twilio customer, Lyft, recently announced that it would start testing Vonage's (NASDAQ:VG) Nexmo platform as an alternative to Twilio's service.
Nutanix's sales soared 85% to $444.9 million in fiscal 2016 on growing demand for HCI solutions. Wall Street expects sales to rise another 66% this year. Those numbers look solid, but a slowdown in sequential growth last quarter indicates that sales could peak this year. Moreover, Nutanix faces tough questions regarding Hewlett-Packard Enterprise's (NYSE:HPE) recent acquisition of its rival SimpliVity.
That $650 million buyout is troubling because it makes HPE -- which already has a massive presence in enterprise hardware, software, and services -- the second largest player in the HCI market after Nutanix. HPE will inevitably bundle SimpliVity's services with its other enterprise products -- which could render Nutanix obsolete.
The short of it is that both businesses could lose customers in the near future.
How profitable are Twilio and Nutanix?
Twilio and Nutanix are both unprofitable, and analysts don't see them achieving either non-GAAP or GAAP profitability anytime soon. That's because the cost of running cloud servers, securing new customers, and offering competitive prices doesn't leave much room for profits -- unless the companies scale up dramatically.
Twilio posted a non-GAAP net loss of $0.16 per share in 2016. Due to the gradual loss of Uber, the company expects that loss to widen to $0.27-$0.30 per share this year. That bottom line decline won't be good for its cash flow -- the company's cash and equivalents already dropped 61% sequentially to just $118.4 million last quarter. This raises the troubling possibility of another secondary offering in the near future.
Nutanix's net loss in fiscal 2016 is unknown. But the company's quarterly net loss nearly tripled last quarter, and it's expected to post a non-GAAP net loss of $1.49 per share this year. On the bright side, Nutanix's cash cushion remains strong, with its cash and equivalents staying nearly flat sequentially at $226 million last quarter.
The valuations and verdict
Twilio trades at 4.8 times sales, which is slightly lower than its industry average of 5.6. Nutanix's P/S ratio of 3.6 is also lower than the industry average of 5.5. Nonetheless, investors probably shouldn't consider either stock "cheap" due to their top line challenges and lack of profitability.
Both stocks remain highly speculative plays, but I'd still pick Twilio over Nutanix because it dominates a valuable niche service and faces less direct competition. Nutanix is well-poised to profit from growing demand for HCI solutions, but I have doubts that it can survive competition from HPE and other tech giants which are all aggressively expanding into the same market.