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What a rollercoaster ride the past nine years since the IPO have been for Nutanix shareholders! After going public in September 2016, the stock initially plummeted to just under $15, only to quadruple to $61 within a year. However, Nutanix shareholders could only dream of the high reached in June 2018 in the following five years, as the stock moved sideways in a very volatile range between $15 and $50. Since the summer of 2023, however, this movement has been history and Nutanix stock has been pushing strongly upward.What a rollercoaster ride the past nine years since the IPO have been for Nutanix shareholders! After going public in September 2016, the stock initially plummeted to just under $15, only to quadruple to $61 within a year. However, Nutanix shareholders could only dream of the high reached in June 2018 in the following five years, as the stock moved sideways in a very volatile range between $15 and $50. Since the summer of 2023, however, this movement has been history and Nutanix stock has been pushing strongly upward.
Source: stock price
The reason for this is the seemingly unstoppable triumph of artificial intelligence and everything that goes with it. This includes the infrastructure on which artificial intelligence and its fields of application can be built. It is precisely this infrastructure that the company Nutanix provides.
While shareholders have enjoyed returns of just over 100% since the IPO, Nutanix has achieved returns of nearly 250% for investors in the past three years alone, driven by steadily increasing revenues. Reason enough to take a closer look at the stock. Is the Nutanix story over after the strong rise of recent years?
Digital development is constantly giving rise to new applications, especially in the areas of artificial intelligence and cloud technology. This leads to ever-increasing amounts of data and makes IT systems significantly more complex.
Old, separate IT solutions are no longer sufficient to keep pace with the speed of innovation. Companies therefore need a central platform that helps them easily manage applications and data everywhere—in the data center, in the cloud, or at remote locations.
Nutanix has a solution for this: an infrastructure that combines computing power, storage, and networking in a single system. Today, Nutanix goes even further and connects different IT locations to a unified, hybrid multi-cloud platform.
The Nutanix Cloud Platform (NCP) simplifies the management and operation of modern IT infrastructures by combining computing power, storage, and control in a centralized solution. Companies can run their applications securely and flexibly, whether in virtual machines (VMs), i.e., simulated computer systems within a physical system, or in containers that bundle individual applications and their dependencies. For example, when operating an online store, the display of the website, the processing of requests, payment processing, etc. are divided into different containers so that they can function smoothly on many different computers at the same time. Data can therefore be efficiently managed, centrally controlled, and scaled in the Nutanix Cloud, regardless of its storage location, even in large quantities.
In the past, specialized networks connecting storage devices to servers were often used. These can be replaced by the Nutanix platform, as it offers the same performance and reliability but is simpler and more flexible in design. The platform's architecture is designed from the ground up to optimally support modern technologies such as artificial intelligence or applications that are now cloud-based, i.e., no longer run on a central computer.
Nutanix is therefore a platform that can be used to centrally control IT systems – regardless of whether they run in the cloud, such as on Microsoft Azure or Amazon Web Services, or in a company's own data center. Instead of using different tools for each environment, Nutanix uses a uniform infrastructure across all IT systems, so that, for example, a website that runs partly on the Microsoft cloud and partly on Amazon can still be controlled centrally and uniformly. This makes it easier to automate processes and keep everything clearly under control – without having to constantly jump back and forth between different systems.
The Nutanix cloud platform has integrated artificial intelligence and machine learning capabilities. These help optimize system performance, proactively plan resources, and automatically detect and resolve potential issues. With one-click upgrades, the system is also updated automatically and without downtime.
A major advantage of the Nutanix cloud is that it is particularly fail-safe. It automatically protects data and ensures operation even in the event of disruptions. Features such as automatic data replication and rapid recovery of individual systems ensure that everything is quickly available again in an emergency.
In recent years, Nutanix has completely transformed itself from a hardware provider for storage and computing power to a pure software provider. The software solutions now also work on hardware that does not originate from Nutanix.
However, Nutanix also faces fierce competition. This includes traditional IT system providers such as Dell, HP, and IBM, as well as infrastructure providers that offer solutions similar to Nutanix, such as VMWare and Broadcom. Cloud providers such as Amazon (Amazon Web Services), Microsoft Azure, and Google Cloud also offer cloud infrastructure services, some of which are rendered redundant by Nutanix products. They are therefore both partners and powerful competitors of Nutanix.
But how did Nutanix perform in the past quarter? The development of the stock price in recent weeks already gives an indication: very well. Nutanix increased its revenue by around 19% compared to the same quarter last year. This represents an acceleration in revenue growth compared to previous quarters. Based on the last 12 months, revenue growth of 18% is slightly below that of the previous quarter.
Looking at revenue growth in StocksGuide over a longer period (up to 20 years of data history available in StocksGuide), it can be seen that, after a long period of slowing revenue growth between 2016 and 2020, Nutanix has recently managed to achieve higher revenue growth again. At the same time, it can be seen that the company's gross margin has risen steadily in recent years and has now reached a new high of almost 87%.
Source: StocksGuide
This shows that Nutanix has successfully transitioned from a business model based primarily on hardware sales to one focused on software. On the other hand, Nutanix is able to increase its prices beyond the cost increases incurred, thereby expanding its margins. This suggests a competitive advantage over its rivals.
Other operating costs, such as those for sales and marketing, research and development, and administration, also rose at a significantly slower rate than gross profit, at just under 11%. As a result, operating income rose disproportionately. However, it should be added that the company still spends more than $300 million, or 14% of revenue, on stock-based compensation—a figure that continues to rise. Here is the complete overview of the fourth quarter figures.
Source: key metrics
Nutanix is forecasting revenue growth of around 15% for the coming year.
Looking at Nutanix's cash flow statement, it is striking that it declined slightly despite high operating profit growth. At first glance, the company is therefore not succeeding in converting its profits into cash flow increases.
Source: StocksGuide
However, this is not entirely accurate, as the devil is in the details. In the fourth quarter of last year, a convertible bond issued by the company—i.e., a loan from a lender that can be converted into stocks—was converted into stocks. The total value of this conversion was $108 million. This amount was recorded as an expense in the income statement, thereby reducing profits. However, as this is not a payment, the amount does not affect cash flow. The expense is therefore added back into the cash flow statement. At Nutanix, this was done in the operating cash flow—normally, such an entry would be more common in the financing cash flow. Without this one-time effect in 2024, free cash flow growth would be around 40%.
For the coming year, Nutanix is planning free cash flow growth of around 8%—this is significantly below both the previous year's growth and the expected revenue growth. Let's now take a look at the balance sheet, where there are also a few points to note.
Source: balance sheet
Firstly, the negative equity is striking. This is the result of losses accumulated over the years, which exceed the paid-in capital and reserves. As Nutanix has consistently incurred losses in recent years, its equity has developed negatively. For a publicly traded software company with stable liquidity, this is not critical at present.
Nutanix also has a high level of debt of just under $4 billion, which is only offset by cash and short-term securities of around $2 billion. However, $2.1 billion of this is deferred revenue, i.e., revenue for services that Nutanix has not yet provided but for which the company has already been paid. Strictly speaking, this is not Nutanix's debt, but rather services still to be rendered, which will then be recognized as revenue. Another $1.3 billion is attributable to convertible bonds. If the stock continues to perform well, it is expected that these will not have to be repaid, but will instead be converted into stocks, diluting existing investors. It is interesting to note that Nutanix issued convertible bonds worth just under $850 million last year. Dilution of Nutanix shareholders.
Due to the continuing high level of stock-based compensation and the high issuance of convertible bonds, the question of dilution of Nutanix shareholders inevitably arises. Although Nutanix diligently repurchased approximately $400 million worth of stock last year ($310 million in direct stock repurchases and $95 million in early redemption/repurchase of the 2027 convertible bond), this is far from sufficient to offset the issuance of new stocks and convertible bonds. Last year, the number of outstanding shares increased by only one percent.
Source: shares outstanding
However, the deposited number of stocks of 269 million only reflects the stocks actually outstanding and not the options that can still be exercised, for example through convertible bonds. The number of stocks including exercisable options is approximately 297 million. The “potential” number of stocks and the “potential” dilution of shareholders were therefore significantly higher last year. Investors should definitely keep an eye on this development.
Nutanix achieved a total of 11 out of a possible 18 points in the HGI score. The company achieved full marks in the assessment based on revenue and high gross margin. The Rule of 40 score is above the decisive threshold of 40, achieving 2 out of a possible 3 points. The full score in the P/E ratio assessment compared to EBIT growth completes the score. However, this assessment should be treated with caution in the case of Nutanix, as EBIT growth is over 600% due to the lack of profitability in the previous year.
Source: HGI
It is also unclear to what extent the one-time expense associated with the conversion of the convertible bond is reflected here. Therefore, the PEG ratio will certainly be relativized in the coming quarters.
The Nutanix leadership team is headed by CEO Rajiv Ramaswami, who has held the position since the end of 2020. He took over the leadership of Nutanix during its most difficult operational phase to date, which was characterized by low revenue growth and a low share price. Ramaswami brings with him many years of experience from leading technology companies such as VMware, Broadcom, and Cisco, which are direct competitors of Nutanix. Under his leadership, Nutanix is focusing on simplifying hybrid multicloud infrastructures and placing great emphasis on operational efficiency. Ramaswami is supported by CFO Rukmini Sivaraman, who has been responsible for the finance department since 2022. She came from within the company itself and brings extensive experience in financial planning and strategic management.
In recent years, under the leadership of its new CEO, Nutanix has successfully transformed the company from a hardware to a software provider. It is a leader in hybrid cloud infrastructure and is currently one of the winners in the age of artificial intelligence. Its growth rates are impressive and have even accelerated slightly recently. Free cash flow is also currently growing at a significantly above-average rate. An EV/FCF multiple of around 26 therefore does not seem excessively high. In addition, the current triple-digit P/E ratio is put into perspective when one considers that Nutanix has not been profitable for very long. The biggest unknown for Nutanix at present is the high dilution of existing shareholders. In the past three years alone, the number of outstanding shares has risen by almost 20%:
Source: shares outstanding
The company has recognized this problem and is stepping up its stock buybacks. However, these are currently not sufficient to cover the issuance of share-based compensation and convertible bonds. If Nutanix succeeds in keeping the number of outstanding shares virtually constant in the future, there will be nothing to prevent further price increases.
Source: target price
This opinion is also shared by analysts, who predominantly recommend buying the stock but no longer see particularly high price potential due to the slowdown in growth momentum.
It's best to set an EV/Sales alert in StocksGuide at 6. That could be a good threshold for taking another look at the stock. This way, you will be automatically notified when Nutanix's valuation has fallen again slightly.
The author and/or persons or companies associated with StocksGuide own or may own shares of Nutanix. This article represents an expression of opinion and does not constitute investment advice. Please note the legal information.