Nimble Storage (NMBL) shot up in after-hours trading after a 21% year-over-year revenue growth and gross margins remaining strong at 67%. The company is still losing money—its trailing twelve month EPS is -$1.65, but that hasn’t stopped investors from jumping into this company.
What does NMBL do? As a producer of flash storage platforms, Nimble focuses on selling storage solutions to enterprise clients in an incredibly competitive—and fast-growing—industry. Thus it’s a high-growth high tech stock, which are infamous for trading at tremendous valuations and for attracting investors who tolerate negative cash flows.
Some of the financials for NMBL are troublesome. The company’s profit margin is a shocking negative 50%, with over half of expenses coming from SG&A. This is unusual for tech companies, which often operate at a loss by focusing on research and development, but R&D is just 20% of expenses. In fact, SG&A represented 81% of total revenues in the last quarter, which has risen from 72% in prior quarters.
Then there’s the debt issue. Total liabilities are $180 million as of last quarter, versus $322 million in assets. That’s a debt-to-equity ratio of 0.55, which is quite good for a startup (or indeed for any company), and somewhat offsets the company’s cash flow problems. However, an increase in shares outstanding has meant quarter-over-quarter declines in shareholders’ equity, so investors are owning less and less of the company. The company is clearly using stock issuances to keep its debt load low, so the question investors need to ask is whether a 10% year-over-year increase in shares outstanding is a justified means of raising capital.
Now what about the company’s valuation? We can’t look at a P/E ratio since earnings are negative, but that’s rarely used in high-tech stocks. Instead, price-to-sales is a more commonly used metric. NMBL’s P/S ratio for the last four quarters is about 2, since its market cap is $730 million and revenues were $353 million. This is a very low P/S ratio for a tech stock, and is actually a sign that the market has largely lost faith in the company.
The firm’s share price is the cause of this changing value. Over the last 5 years, the company has lost 74% of its value as revenue growth has steadily decelerated from over 100% to 21% in the last quarter. But with better-than-expected revenues in the last quarter, has the market finally priced in the company’s declining revenue growth?
To answer that question, we would need to take our analysis one step further and compare the company’s 21% growth to the market’s broader growth. Comparing those two numbers will tell us if Nimble is losing or gaining market share—which in turn will tell us how effective the company has been in attracting customers. We already know from last quarter that the company’s customer base rose 43% on a year-over-year basis as bookings rose to $1 billion. But why is the customer base growing? What exactly do customers think about Nimble’s products?
These are the questions we need to get answers to before deciding how to value Nimble. If sales are going to keep rising as they have, we might see a continued improvement in the stock price, especially if the sector is growing at a lower rate. However, if this is just a temporary aberration, Nimble’s decline could continue.
This again demonstrates that investing in high tech requires more than an expertise in high finance—we need to get under the hood, get our hands dirty, and understand the company we’re investing in. With such high volatility and risk, blindly investing in a company we don’t understand can be extremely dangerous. And managing that risk is what investors need to do if they want to get alpha.