2023-04-19 21:46:03 ET
Summary
- Nutanix holds the No. 2 market share position behind VMware in the HCI segment.
- Nutanix has strong top-line drivers in cloud infrastructure and cloud management in the hybrid multi-cloud environment.
- Despite intense pricing pressure from legacy competitors, Nutanix has differentiated solutions and an expanding gross margin profile.
- I have an end-of-year price target of $35 based on a forward EV/sales assumption of 4x and a consensus revenue estimate of $2.04 billion for FY 2024.
Thesis
I believe Nutanix, Inc. ( NTNX ) is a compelling investment opportunity due to its top-line drivers in cloud infrastructure and adjacencies in cloud management. The company has a strong market position behind only VMware (VMW), and its solution is cloud, server, and hypervisor agnostic. As a pure software company, NTNX has the potential to outgrow traditional providers with inferior software and expensive hardware bundles. The company has fully transitioned to a software/subscription model and is entering hybrid cloud adjacencies to capture more TAM and gain a wider moat. NTNX stock trades at its historical 5-year average of 4x EV/rev and a few turns discount on multiples compared to its software peers, despite having similar growth profiles. I have an end-of-year price target of $35 based on a forward EV/sales assumption of 4x and a consensus revenue estimate of $2.04 billion for FY 2024.
Nutanix is a leader in the HCI segment
The hyper-converged infrastructure [HCI] segment has emerged in recent years, with legacy vendors and upstarts introducing solutions. Legacy vendors such as Dell/EMC, VMware, Cisco, HPE (SimpliVity), and NetApp have introduced solutions, while upstarts such as Pivot3 and Scale Computing have also entered the market. However, Nutanix has developed differentiated solutions that can overcome competitive pricing pressures. This is evidenced by an expanding gross margin profile and rapid uptake of Nutanix solutions by Global 2000 enterprises, with penetration reaching 50%.
Nutanix has established itself as a best-of-breed vendor in the HCI segment, allowing the company to overcome intense pricing pressure from legacy competitors such as Dell/EMC. Nutanix's offering is an easy-to-use solution, differentiated by its software, that can be deployed across multiple hypervisors and clouds with a unified management platform. Additionally, the company's solution can leverage the Acropolis Hypervisor (AHV), an open-source hypervisor technology based on Linux KVM, which serves as a viable alternative to more expensive alternatives. Compared to other vendors, Nutanix solutions tend to be deployed in centralized data centers rather than smaller edge deployments. However, the company is expected to broaden its portfolio over time to address the smaller edge deployment segment of the market.
Nutanix's expanding gross margin profile and rapid uptake of solutions by Global 2000 enterprises are indicative of a successful business model that can overcome competitive pricing pressures. With the HCI segment expected to grow at a double-digit CAGR through 2025, Nutanix is well-positioned to continue to address a large TAM and differentiate its solutions from competitors.
NTNX Gross Margins and Rev Growth ( YCharts )
Addressing a Large TAM
More storage budgets are shifting towards HCI and away from traditional and cumbersome storage arrays. 650 Group estimates that HCI solution segment will increase to $27 billion by 2025, growing at a CAGR of 28%. Despite having superior technology and platform, in my view, NTNX has the No. 2 market share position behind VMware. According to an IDC study , customers using HCI offering cited 51% lower cost of ownership, 94% less unplanned downtime and only six months to payback. In a potential downturn, customers could consolidate spending to within the top 2 HCI players in order to reduce vendor sprawl, which should lead to NTNX taking share from smaller players.
More storage budgets are shifting towards hyper-converged infrastructure and away from traditional and cumbersome storage arrays. Going forward, HCI is expected to grow at a double-digit CAGR through 2025 vs. LSD growth for the overall storage market. The hyper-converged segment fits within the broader global converged systems classification that includes hyperconverged infrastructure, integrated platforms, and certified reference systems. As the velocity and volume of data continue to expand, companies offering HCI solutions are catering to a part of the market that is growing significantly.
More than just a HCI vendor
Nutanix has been expanding beyond its HCI domain to provide a robust platform of enterprise cloud solutions. NTNX has been gaining more traction with its cloud management platform and other emerging products, with better cloud management attach rate to infrastructure offering, which further differentiates the company, broadens its TAM ($26 billion of incremental TAM), and importantly foreshadows how the company can increase its monetization potential in the future.
Moreover, NTNX has boosted its GTM partnerships in recent years with solution-oriented selling. The partnership with HPE's Greenlake should help it better compete against Dell/VMware, especially as HPE is comp neutral to NTNX. Nutanix Cloud Cluster on AWS is getting more traction, and NC2 with Azure is on the horizon. NTNX also recently announced a few joint wins with RedHat OpenShift for its Kubernetes capabilities.
Valuation
Although NTNX currently trades at a big 20-70% discount to peers, I believe the valuation gap will close as near-term hardware shortages ease, and NTNX works towards FCF breakeven and profitability. NTNX also trades at a 50% discount vs. its historical 5-year average of 4x EV/rev.
I present valuation metrics and model profiles of the relevant comp groups for Nutanix. My selection of comps includes a mix of disruptive companies across the IT hardware, data networking, and software segments. In my view, the primary peer group for Nutanix has historically been more hardware-centric in nature. However, as the company has transitioned its financial profile towards software, I believe that software comps are becoming more applicable.
Nutanix trades at an EV/Revenue multiple of 3.2x, compared to the software peer average of 5.8x. NTNX trades at a few turns discount on multiples despite having similar growth profiles vs. comps. I believe at the current undemanding valuation level, NTNX represents an attractive risk/reward. I set an end-of-year price target of $35 based on a forward EV/sales assumption of 4x and a consensus revenue estimate of $2.04 billion for FY 2024.
NTNX Valuation Metric vs Peers ( YCharts )
Risks
NTNX has undergone multiple transitions, including a shift from appliances to software-only and from term licenses to SaaS, which has led to execution issues. The company is still not profitable, and in a rising rate environment, software companies without profits are getting penalized on revenue multiples. Moreover, NTNX faces increased competition from various vendors, including VMware, OEM players with bundled hardware and software deals, and deep-pocketed public cloud vendors like AWS Outposts and Azure HCI Stack. This increased competition may put pressure on Nutanix's revenue growth or margin. However, Nutanix's hyper-converged operating system is more competitive than its peers, as very few vendors can decouple their hyper-converged operating system from their underlying hardware. While there may be risks associated with executing transitions and increased competition, NTNX's software is still competitive, and the company may still be able to achieve its long-term guidance of 20%+ revenue growth with 15% FCF margins by FY25, though there are execution risks that remain.
Final Thoughts
Nutanix has the No. 2 market share position behind VMware in the HCI segment, which is expected to grow at a double-digit CAGR through 2025. NTNX has strong top-line drivers in cloud infrastructure and cloud management in the hybrid multi-cloud environment. Despite intense pricing pressure from legacy competitors, Nutanix has differentiated solutions and an expanding gross margin profile. Overall, I believe Nutanix is well-positioned to address a large TAM and offers solutions that are differentiated enough to overcome intense pricing pressures. Nutanix's expanding product portfolio and go-to-market partnerships further differentiate the company and increase its monetization potential. I set an end-of-year price target of $35 based on a forward EV/sales assumption of 4x and a consensus revenue estimate of $2.04 billion for FY 2024.
For further details see:
Nutanix: A Leading Player In A Fast-Growing Segment