There’s huge pressure for large companies to modernize their IT infrastructure in the wake of the “Amazon-ification” of infrastructure by AWS.

Tintri (TNTR) is a cloud storage company trying to position themselves as an “enterprise cloud” provider. It’s a smart thing to do but fairly misleading based on their existing revenue and product mix. You can read the annotated TNTR IPO Transcript for all the details and also review the TNTR IPO Roadshow Slides.

They do have some technical advantages as a cloud-storage company in terms of their ability to mix and match with network and compute resources. But they are still painted with the same “cloud storage” brush. The leading company in this space is Pure Storage (PSTG) which came public in October of 2015 at $17 and has since traded mostly in a range between $10 and $14. PSTG currently changes hands at $13.49.

One disturbing aspect of the Tintri story is their heavy reliance on channels combined with their large investments in their own sales teams. It appears as if their sales teams still do most of the selling and then they run the revenue through channel partners who may also provide some additional implementation services. Company management doesn’t explain this anywhere but they are not getting much leverage from their channel partners.

For investors, the challenge of the cloud is competition and margins. There is a relentless pressure on both price and features. Any advantage is hard to sustain in the face of market forces. This is the biggest single reason it’s hard for companies like Pure Storage and Tintri to get premium valuations. Achieving “sustainable profitability” in this space requires near-perfect execution in all areas of the business - technology development, sales and operations.

The growth rate at Tintri is slowing down. As we can see below, annual revenue growth declined from over 70% to 45% in 2017 and in the most recent quarter dropped further to 33%.

It could be that Tintri sandbagged a little bit in the April 2017 quarter to push some deals into what will be their first quarter to be reported as a public company. If so, that will suggest investors will need to look carefully at the Q3 guidance for clues about the sustainable growth rate.

If we take their plans at face value and accept their long-term model, you can see the IV below.

Conclusion

Thanks to some public market history for Pure Storage, the market has mostly sorted out what price to pay for a company like Tintri. Based on our IV model, the $12 midpoint is reasonable. However, the slowing growth rate and high-cost sales model may cause some investors to wait to see if Tintri can accelerate growth and demonstrate more leverage from their channel partners.