NTNX - Nutanix's Profitability Milestone And Share Repurchase Program

2023-09-28 10:37:57 ET

Summary

• Nutanix, Inc. is an exciting investment opportunity, boasting a $2 billion annualized run-rate in revenues and significant growth potential.
• The introduction of "GPT-in-a-Box" positions Nutanix to address the growing demand for generative AI solutions.
• The stock is priced at approximately 30x forward free cash flow, a multiple that seems fair for new investors to the stock.

Investment Thesis

Nutanix, Inc. ( NTNX ) offers a hyperconverged hybrid storage and database services that simplifies data management, providing customers with the freedom to choose the deployment model that suits them best. For instance, if there are data security issues that require their data to stay on-premise rather than in the cloud.

Nutanix may not be a well-known name, but it makes up for that by being an exciting investment opportunity.

This is an exciting investment opportunity, as Nutanix is annualizing on a forward run-rate $2 billion in revenues. Further, the company still has some growth left and its valuation isn't stretched. There is a minor pesky detraction to the bull case, that I will expand upon soon. But in sum, there's a lot to like here.

Nutanix's Near-Term Prospects

Nutanix is a provider of enterprise cloud solutions, offering the Nutanix Cloud Platform, a comprehensive set of software solutions and cloud services. Their platform enables organizations to adopt a consistent cloud operating model across various environments, including edge, private, hybrid, and multi-cloud.

Nutanix's solutions simplify the management and movement of workloads, encompassing a range of applications such as enterprise applications, databases, virtual desktop infrastructure, and more. This flexibility allows customers to seamlessly run and transition workloads between on-premises and public cloud environments. To put it succinctly and perhaps more simply, it's a fully-fledged hybrid cloud solution.

Nutanix was at first one of the pioneers of hyperconverged infrastructure by combining compute, storage, and networking into a single product.

However, over time, they've expanded their offerings and have now transitioned from a hardware-focused company to a software-focused one. Nutanix's cloud platform empowers organizations to unify operations, infrastructure, and data services across different cloud environments, promoting flexibility.

They now operate on a subscription-based business model with a focus on flexible licensing.

Nutanix's Nutanix Cloud Platform provides a scale-out architecture, enterprise-grade data services, and infrastructure choice, making it a versatile solution for running diverse workloads, including end-user computing, databases, containerized applications, AI, and more.

Moving on, Nutanix has recently made significant strides in its business operations, for example, launching NC2 on Microsoft Azure ( MSFT ) and introducing new products in crucial areas like Kubernetes, data services, and cloud management. Moreover, a strategic partnership with Cisco ( CSCO ) opens up new avenues for Nutanix, enabling them to tap into a broader market with larger enterprise accounts.

Furthermore, Nutanix successfully clinched significant contracts with both enterprise and government customers, underscoring the importance of its platform in facilitating critical transformation endeavors. The company's venture into the realm of artificial intelligence through "GPT-in-a-Box" serves as a proactive strategy to cater to the growing need for generative AI solutions.

Here's a quote from its fiscal Q4 2023 earnings call that echoes this assertion,

We [have] recently launched GPT-in-a-Box. This is a full stack, software-defined AI-ready platform along with services to help our customers size and configure hardware and software to deploy a curated set of LLMs using the leading open-source AI frameworks on our platform.

It allows customers to easily deploy AI-ready infrastructure to fine-tune and run generative pre-trained transformers or GPTs, while maintaining control of their data and applications.

Nutanix's introduction of "GPT-in-a-Box," is its full-stack AI-ready platform that caters to the growing demand for generative AI, positioning itself to support customers in fine-tuning and running AI models on-premises and at the edge.

Considering this background, let's delve into Nutanix's financial performance.

Revenue Growth Rates Point to Mid-Teens CAGR

Nutanix's revenue growth rates are a mixed bag. Needless to say that the quarter just end was remarkably strong at 28% y/y revenue growth rates.

However, we have to keep in mind that fiscal Q4 2022 was a notably weak quarter, hence the comparables were very easy.

Consequently, if we look out to its guidance ahead, Nutanix presently guides for about 14% CAGR. That's a pretty significant drop from a company that has just finished reporting high 20s% CAGR.

That being said, consider the table that follows.

What you see here is a company that has a long history of beating analysts' estimates. Therefore, I believe it's reasonable to assume that there might be some more for growth incorporated into Nutanix's guidance for fiscal 2024.

Moreover, we should keep in mind that Nutanix is already annualizing its run-rate at $2 billion in revenues. Those are not small sums. This means that for Nutanix to be growing at a multi-billion dollar revenue per year while still growing, it has to be doing something right.

With this in mind, let's discuss its valuation.

Profitability Profile, Breaking a Record

Nutanix just had its first year of non-GAAP profitability in its history with a non-GAAP operating margin of 9%. Despite some expected one-time payments, they generated free cash flow in excess of $200 million.

And its guidance for the year ahead, while still really early in the year, already points to $300 million at the high end. This implies that the stock is priced at 30x forward free cash flows.

If we can largely assume that Nutanix may end up delivering somewhere around 15% to 18% CAGR in its upcoming year, having to pay 30x forward free cash flows is a very fair entry point for new investors looking at the stock.

The one pesky drawback to this investment thesis is that Nutanix's balance sheet carries approximately $1.3 billion of debt. Yes, this is offset by its approximately $1.3 billion of cash and equivalents, but this high debt figure will in some ways restrict its options, in terms of Nutanix embracing some large bolt-on acquisitions.

That being said, management believes that it has more than enough cash and believes that its best use of cash is to repurchase its stock. As such, Nutanix has announced an open-ended $350 million share repurchase program.

In sum, putting aside its balance sheet consideration, there's a lot to like here.

The Bottom Line

Nutanix, a relatively lesser-known player, presents an intriguing investment opportunity with its hybrid storage services that simplify data management. The company is annualizing forward run-rate of $2 billion in revenues, and its potential for continued growth makes it an exciting prospect.

While its revenue growth rates may show some fluctuations, Nutanix's history of beating analyst estimates suggests a potential for further growth not fully reflected in its guidance.

With an attractive valuation, around 30x forward free cash flows, and a commitment to share repurchases, Nutanix presents a compelling investment opportunity, despite some debt-related considerations.

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