Is hyperconvergence the next big thing in tech?

Opinion: After Nutanix IPO, tech giants jump to offer software that manages data stored on private servers and public cloud

Nutanix Inc. co-founder and Chief Executive Dheeraj Pandey attempts to explain hyperconvergence at the company's San Jose headquarters.

Hyperconvergence may never be a household word, but in Silicon Valley, last year’s booming initial public offering of Nutanix Inc. has pushed more big tech companies to jump into the young technology in hopes that it is the next big thing.

Simply put — or as simple as the complex technology can be — hyperconvergence combines storage and computing functions in disparate systems through software on a single device, similar to the software-based virtualization movement sparked by VMware Inc. VMW, +0.89%  a decade ago. Just as VMware’s software allows a single computer to host multiple virtual machines running different operating systems, hyperconvergence makes it easier to store and manage data spread across private servers and the public cloud from a single appliance, critical for companies that use a “hybrid” approach to the cloud.

“Everyone and their brother are either thinking about a hyperconverged system or building new ones,” said Richard Fichera, a Forrester Research analyst. “It’s a hot active area right now because it has a high value to its users.”

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Just as VMware’s 2007 IPO and subsequent success pushed legacy enterprise-tech companies to jump into that field, last year’s Nutanix NTNX, +1.91%  IPO put the spotlight on its pioneering concept of hyperconvergence and has attracted the attention of those same companies, which want a piece of a sector expected to grow into a $6 billion industry in the next few years.

“It is an extremely exciting space,” said Stefanie Chiras, vice president of power systems at IBM Corp. IBM, -0.18%  “We are watching the space extremely closely…The growth rates are incredible.”

Gartner projects that hyperconvergence revenue will grow at a compounded annual rate of more than 60% in the next few years.

In January, Hewlett Packard Enterprise Co. HPE, +1.44%  purchased a young company in the field called SimpliVity for $650 million. Storage appliance maker NetApp Inc. NTAP, -0.61% told investors in February it is working on a next-generation hyperconvergence product based on technology from SolidFire, a company it acquired in 2015 for $870 million. Cisco Systems Inc. CSCO, -0.36%which unveiled its own hyperconverged infrastructure in March 2016, said one year later that 1,100 customers had embraced its HyperFlex offerings in their first nine months on the market.

Nutanix, though, is the poster child for this new computing trend, having coined the term “hyperconvergence.” The eight-year-old San Jose, Calif., company was one of just a handful of tech IPOs in 2016, capturing investors’ attention with stunning revenue growth rates, a large and growing customer base and its vision to become a platform company.

Read also: Nutanix’s eye-popping post-IPO pop is largest of the year

Nutanix software is simply trying to make computing mirror life, the company’s co-founder and chief executive told MarketWatch in an interview at the company’s headquarters.

“A life analogy is housing or lodging,” Nutanix CEO Dheeraj Pandey said. “When I go travel for two nights, I rent a hotel. When I go away for a month, I will rent corporate housing. But if I move for three years, I will own a home.”

With hyperconvergence, companies don’t have to choose between those types of scenarios in computing power, which can be bought through on-premises servers or rented through public-cloud offerings, he said.

“There will be all sorts of different lifespans of owning and renting [computing power]. At the end of day, we are not as wedded to the idea of renting, as we are to converging the two. We have always been about converging.”

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Pandey noted that when the company was founded in 2009, the cloud had not really taken off yet, but that made his company’s technology popular with companies that were just starting to move to cloud computing.

“We had to start it ‘on-prem,’” he said, referring to computing systems or data centers on a customer’s premises, instead of in the cloud. “The large enterprises want the first step toward cloud…its actually a five-year journey.”

He noted that in public cloud systems, VMware’s software, which partitions parts of a server to run different operating systems, is not even visible to the user.

“Why shouldn’t it be the same experience in private cloud?” he asked.

See also: Cloud-computing ETF hits new high amid strong industry growth

So Nutanix built an enterprise cloud operating system that Pandey says can meld two data centers, one that is owned and one that is rented.

“You can drag and drop from one to the other,” he said. “That is where the world is really headed.”

Nutanix has recently suffered its first major struggles as a public company, tumbling 30% in the past three months thanks to a disappointing forecast that may be partly attributable to rising memory prices and the end of a post-IPO lockup, but is still trading about 20% higher than its $16 IPO price, with a market cap of about $2.7 billion.

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For the large tech companies that are not offering public cloud services like Amazon.com Inc.’s AMZN, -0.38%  Amazon Web Services and Microsoft Corp.’sMSFT, -0.08%  Azure, hyperconvergence represents an opportunity to address the so-called hybrid cloud market. While cloud computing has become popular, many experts consider a hybrid approach will prevail in the end, as companies look to keep their most important or sensitive data on servers they own and maintain.

“Hybrid cloud — that is, cloud-style systems or infrastructures that run in private data centers but interact with public clouds like AWS and Azure — has become the methodology of choice for most enterprise customers,” said Charles King, an analyst with Pund-IT, in an email.

Many large tech providers were far too late to challenge for the cloud-computing market, since building up a public cloud service is a huge infrastructure expense and Amazon got quite a head start.HPE and Cisco, for example, have both recently abandoned their public cloud efforts as they eye a hybrid approach.

Don’t miss: Dot-com bubble 2.0: The cloud buildup

Even companies that have succeeded in offering public cloud services see value in hyperconvergence. Sid Roy, group program manager for Microsoft’s Windows Server group, said many customers looking to upgrade hardware find the cost to upgrade their storage systems is daunting, and look for a different approach.

“Enterprise service providers are very conscious about cost, where storage can be up to 60% of the data center costs,” Roy said. “If you are not ready to go to the cloud but you are thinking of lowering your storage costs, hyperconverged is a good way to go. …Hyperconverged is a key part of our private cloud strategy.”

The growth rate for the hyperconvergence market is potentially huge, with a 60.5% compounded annual growth rate projected for the next several years, according to market research firm Gartner Inc.

“We would call hyperconvergence the fastest-growing segment of the integrated systems market,” said George Weiss, a Gartner analyst. “We are forecasting it to be a $6 billion market by 2020,” compared with $1.2 billion in 2016.

Read also: Oracle continues to hammer at Amazon in the cloud

As should be expected in the tech world, there are a raft of startups seeking to challenge Nutanix or potentially get gobbled up by the tech giants looking to jump into the sector. Cloudistics, an on-premises cloud infrastructure software developer founded in 2013, has raised about $16 million in venture funding; Atlantis Computing, founded in 2006, has raised $32.2 million from investors; and Pivot3, founded in 2002 by veterans of VMware and Compaq, has raised $253 million in venture funding, with its own software storage technology in a configurable, converged appliance.

With companies large and small nipping at its heels, Nutanix isn’t standing still, as it looks to eventually become a bigger platform, with networking and security next on its list to conquer.

“Hybrid becomes the new battleground,” Pandey said. “The aspiration is a platform for the whole infrastructure. There is no misconception that it will happen overnight. Think of AWS, they started in the 2006 time frame, it has taken them 10 years to get here.”

A lot could happen in the next 10 years to disrupt a profitable path for hyperconvergence, but if large enterprises do opt for hybrid-cloud systems as many expect, the hype for the technology could be justified.

Nutanix shares have lost 34% in the year so far, while the S&P 500 SPX, -0.08% has gained 5%. 

Acknowledgement:https://goo.gl/eNwbsR

By Therese Poletti

Source:https://goo.gl/4BFhSz

How to Play Hot Tech IPOs With ETFs

IPO FPX FB BABA TWLO ACIA

After a slow start to the year, global technology IPOs made a smashing comeback last month. 32 technology companies made their public debut—making it the most active September for tech IPOs since the tech bubble era. These companies raised $4.3 billion--42% of total volume in 2016 and the second biggest September volume on record, per Dealogic.


Tech unicorn (private company valued more than $1 billion) Nutanix (NTNX) surged 131% on its debut—biggest first day pop for 2016. Another unicorn—Twilio (TWLO)—had soared more than 90% on the first day of trading. Coupa Software (COUP) surged more than 100% on the opening day.



Acacia Communications (ACIA) is the best performing IPO this year, up 272% since its debut in May. Tech IPOs were up on average 72% from their offer prices, while IPOs across all sectors this year had an average return of 35% as of September 30. (Read:Prepare for a Clinton Presidency with These Stocks & ETFs)



While Twilio and Nutanix were arguably the most-high profile IPOs, the largest offerings this year were made by foreign tech companies. Denmark’s Nets which raised $2.4 billion in September, is the largest tech IPO globally this year. Another IPO exceeding $1 billion--Japan’s messaging app company LINE--is listed on the NYSE as well in Tokyo.

According to a WSJ report, the parent of Snapchat may launch its IPO early next year. The messaging app company could raise $25 billion or more, making it the biggest IPO since 2014 when Alibaba raised $168 billion.

There are many who believe that Snapchat is used mainly by teenagers for sexting but the truth is most users are in the 18-24 age bracket, followed by 25-34. The maturing of the user demographic has made advertisers more enthusiastic about the app.

Unlike rival Twitter, the messaging app company which has started experimenting with hardware has seen strong growth in users and revenues as it continues to innovate. (Read: Is Samsung’s Pain Apple’s Gain: ETFs in Focus)

Other mega unicorns such as Uber, Airbnb and Palantir haven’t announced any plans so far as they have been raising private money at attractive rates.
And remaining private helps them avoid intense public scrutiny.

There are other very high profile US companies that are expected to go public next year. EY expects “very robust” IPO market in 2017, because of a backlog. Many start-ups have put their IPO plans on hold this year due to monetary policy and geopolitical uncertainty. (Read: Will Tech ETFs Continue Their Rally in Q3 Earnings)

“However, as the political situation becomes clearer, the mix of a steady economic backdrop, accommodative monetary policy, low-interest rate environments, still high equity valuations and current low volatility levels are expected to lead to a rebound in IPO activity,” per EY.

Case for Investing in IPO ETFs

Remember, not all IPOs are successful.  Investing in smaller, rather unknown companies can be quite risky. While a handful of these fledgling companies may turn out to be excellent investments, some may result in big losses.

Using an ETF approach is a low-risk and convenient way of getting exposure to this ‘hot” corner of the investing world.

IPO ETFs provide exposure to newly public companies before they join other core US equity indexes. Most broad market indexes include newly public companies only after a ‘seasoning’ period—i.e. after they have been trading for some time. For example, Google was included in the S&P 500 index about two years after its debut.

Investors should however note that they will not be able to capture the first day’s ‘pop’ (or drop!) with these ETFs, since they include the newly public stock only after it has been trading for a few days.

While it is true that some IPOs surge in value on the first day but, first day’s pop appears to be no guarantee for the IPO’s success in future.  Many IPOs do not really shine on the first day but deliver much better performance later, as we can see from the table of five best performing US IPOs this year (Source: IPOscoop.com)



And many IPOs surge on the first day but sink later. The table below shows the performance of five worst performing IPOs.



Many investors probably still remember the disastrous performance of some of the ‘hot’ IPOs from the dot-com era. An ETF approach can largely reduce the risks, while offering the opportunity to participate in the gains of a diversified group of larger, more liquid IPOs.

First Trust US IPO Index (FPX)

FPX tracks the IPOX-100 U.S. Index, which is a modified value-weighted price index measuring the performance of 100 largest, typically best performing and most liquid U.S. IPOs (including spin-offs).

Currently, the product is dominated by Technology (29% of assets) and Healthcare (20%) sectors while Kraft Heinz (KHC), AbbVie (ABBV) and Facebook (FB - Free Report)take the top three spots.  

With a 10% cap on all constituents, the fund rules out too much concentration in any single holding. The ETF, which was initiated in 2006, has managed to attract about $561 million in assets so far.  Looking at the longer-term performance, the product has beaten the broader market since inception, with a return of 11% versus 7.4% return for the S&P 500 index during the same period.