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Nimble Storage (NMBL) made its public debut on Friday, December 13. Shares of the provider of efficient data storage ended their first day with gains of 61.6% at $33.93 per share.

Given a further run-up in the week following the public offering, shares have become a bit too expensive to my taste for any traditional value investor. While growth has been very impressive, so is the valuation, making it easy for me to stay on the sidelines.

The Public Offering

Nimble Storage aims to provide its customers with the most efficient data storage. Following the design and sales of a flash-optimized hybrid storage platform, it aims to disrupt the market. The bottom-up design leads to improved application performance, better storage capacity and great data protection.

Core of this is the Cache-Accelerated Sequential Layout software (CASL) and the cloud-based storage management and support service, InfoSight.

Nimble Storage notes that traditional data storage system providers have been unable to provide a system with great performance and an attractive cost, a gap which the company is trying to fill.

Nimble Storage sold 8 million shares for $21 apiece, thereby raising $168 million in gross proceeds. All of the shares were being sold by the company with no shares being offered by selling shareholders.

Initially, bankers and the firm set an initial price range of $18-$20 per share. Shares were eventually sold just above the high end of the preliminary initial public price range. Some 11% of the total shares were offered in the public offering. At Friday's closing price of $37.50 per share, the firm is valued at $2.64 billion.

The major banks that brought the company public were Goldman Sachs (GS), Morgan Stanley (MS), William Blair, Stifel, Oppenheimer, Needham & Company and Pacific Crest Securities.

Valuation

Nimble has seen phenomenally strong growth. Its solutions are integrated and have pre-validated designs with players like Cisco Systems (CSCO), Microsoft (MSFT) and VMWare (VMW), among others.

The company ended the month of July with 1,750 end-customers which is already up significantly from the 1,090 customers at the end of the calendar year of 2012. The company has 600 resellers offering Nimble's solutions while the company employs an own salesforce as well.

Data, and the use of it in business decisions, is increasing rapidly in importance. Research firm IDC estimates that businesses will spend $42.5 billion on data storage systems by the year of 2017, as found in Nimble's S1-Filing.

For the year ending January 2013, Nimble generated revenues of $53.8 million which compares to revenues of just $14.0 million in the previous year. Net losses increased from $16.8 million to $27.9 million at the same time.

Revenues for the first six months of the year came in at $50.6 million, thereby nearly matching annual revenues for the year before. Revenues rose by 164.8% compared to the comparable period in 2012. Again, losses were on the increase nearly doubling toward $19.9 million.

The company operates with $36.7 million in cash and equivalents. The firm has no debt, and factoring in gross proceeds of $168 million resulting from the offering, Nimble could operate with a net cash position of $180-$190 million. This cash will be used to fund ongoing losses at the moment.

With the equity in the business being valued around $2.64 billion, operating assets are valued at roughly $2.45 billion. This values the company at 45 times past year's annual revenues.

Investment Thesis

As noted above, the offering of Nimble Storage has been a huge success. The company priced the offering at $21 per share, some 10.5% above the midpoint of the preliminary offering range. Ever since, shares have seen a decent jump, accompanied by further gains. At the moment shares trade some 97.4% above the midpoint of the preliminary offering range.

The enthusiasm for Nimble has been based on the phenomenally strong growth rates and the fact that the company operates in the "cloud."

On top of that are encouraging trends which includes the fact that relative loses are declining and gross margins of 62.8% in the first half of this year leave a lot of room for improvements. The company has only been founded in 2007, made its first shipments in 2010 and launched its InfoSight solution as recent as April of this year.

Given the $28.5 million in revenues for the past quarter, the company is already running at an annual run rate of over $110 million per annum, bringing the valuation down to little over 20 times revenues, still a stellar valuation.

Key risks obviously include the losses, although the company can cope with them following the public offering proceeds. Of course a security breach and competition are key risks as well. While big names like EMC, IBM and Hewlett-Packard have long dominated storage, firms like Nimble are rapidly transforming the business. Key in this process is the increasing gap of how much data can be stored on a computer which has outpaced the pace at which firms can "read" the data.

Nimble's solution based on hybrid storage is changing this, making it much quicker to do a task, requiring less power and less money. CEO Vasudevan is not to worried about competition, given the fact that they are not used to these rapid changes.

While growth and margins are impressive, so is the valuation, although Nimble's growth pace remains very impressive. Yet it is hard to judge the company's true competitive advantage, especially with developments occurring very rapidly in the field. For those reasons, I will stay conservative and have no interest taking on any shares at current levels.

Source: Nimble Storage: Great Offering, Great Appeal, Too High Valuation