Summary
- Nutanix continues to push toward higher growth in the future and the overall picture for the company looks favorable on that front.
- Management is also making nice progress toward consistently positive cash flows, but this doesn't make the company a great prospect.
- The business still has a way to go before making for a solid prospect.
Software has been incredibly important in the modern era. The different calculations and other functions that it can perform can have a major impact on any sort of activity, whether it be business oriented or not. It can speed up our tasks, thereby drastically reducing costs, and can do so in a manner that brings about tremendous accuracy. As much as software can and is used on the consumer side of things, perhaps even more vital are the use cases on the corporate side. One company that provides software solutions and cloud services through its own enterprise cloud platform aimed at servicing organizations is Nutanix ( NTNX ). In recent years, the company has exhibited attractive growth on its top line. Profitability has been a true problem, however, and that picture is only today starting to show signs of improvement. Given current expectations about the future, it looks as though the company will succeed in creating value not only for its customers but for its shareholders as well. But at the same time, the lofty price at which shares are trading should cause investors to be a bit cautious.
Up in the cloud
As I mentioned already, Nutanix has built its business around the idea of providing an enterprise cloud platform that consists of software solutions and cloud services. The end objective here is to power its customer's enterprise infrastructure, whether this involves private, hybrid, or even multi-cloud environments. The company achieves all of this through what it calls its Nutanix Cloud Platform. On that platform, the company allows organizations to ‘lift and shift’ their workloads, including their enterprise applications, their high-performance databases, their end-user computing and virtual desktop infrastructure services, their cloud-native workloads, and analytics applications, all between different cloud environments. The company's ultimate objective is to provide a single, simple, and open software platform for all hybrid and multi-cloud applications and data. The vast majority of the company's revenue comes from subscriptions. But it also does generate some of its sales from non-portable software, hardware, and even professional services. But all combined, in the latest fiscal year, these non-core pieces of the pie accounted for just 9.3% of overall sales.
To truly understand the company, we should dig down into each of the core offerings that it provides. These offerings are all supported by unified APIs (Application Program Interfaces), security, and other features. The first such offering category is its Hybrid Cloud Infrastructure. In this category, the company provides a program called Acropolis, which converges virtualization, storage, and networking services as a turnkey solution for clients. Under the Acropolis Hypervisor banner, the company provides native, enterprise-grade virtualization solutions with features such as flexible migrations, automated workload placement, security hardening, data protection, and more.
The company’s Cloud Management offerings include its control panel providing management and analytics across the enterprise cloud platform, as well as other related services. Through this, the company also provides cloud governance and automation services that help to streamline application lifecycle management, provide self-service provisioning using the company's application marketplace, and more. There's also the Emerging Products category, which includes a variety of products like its unified storage, database automation and database as a service offerings, and its desktop as a service feature that provides end-user computing services that can reduce the cost of delivering virtualized desktop and applications with services such as virtualization, life storage, security and networking, and more all baked in. The end use here is to help customers deliver virtual apps or desktops to users from multiple public cloud environments and/or from an enterprise’s private cloud data center.
Over the past few years, the management team at Nutanix has done a pretty good job growing the company's top line. Revenue has risen from $1.16 billion in 2018 to $1.58 billion in 2022. This growth came as a result of a significant increase in the number of customers on its platform. In 2018, for instance, the business had 10,610 customers using its services. This number has increased every year since, including throughout the pandemic. By 2021, it had grown to 20,130. And by 2022, it increased further to 22,600. Over this window of time, the rise in customer count has also been instrumental in pushing up the company’s annual contract value, or ACV for short. This number rose from $328.8 million at the end of 2018 to $756.3 million at the end of 2022. And by the end of 2022, the annual recurring revenue for the company had expanded to $1.20 billion. This is up from the $878.7 million reported the same time one year earlier. Regarding the fourth quarter of its 2022 fiscal year alone, the latest quarter that the company just reported financial results for, Sales came in at $385.5 million. That excited investors because it translated to outperformance relative to what analysts anticipated to the tune of $29.4 million.
As attractive as the company's revenue growth has been, profitability has been a major concern. In each of the past five years, the company has generated significant net losses, with the smallest of these being $297.2 million and the largest being $1.03 billion. During its 2022 fiscal year, the company incurred a loss of $797.5 million. In the latest quarter alone, the company generated a loss per share of $0.67. That beat analysts' expectations to the tune of $0.14 per share and translated to a net loss of $151 million. That compares favorably to the $358.2 million loss the company generated the same time last year. There are, of course, other profitability metrics that investors could be paying attention to.
Operating cash flow over the past five years has been rather mixed, ranging between a low point of negative $159.9 million and a high point of $92.5 million. There has not been any clear trend on this front and, in 2022, it came in positive to the tune of $67.5 million. For the latest quarter alone , it was positive in the amount of $38 million. That compares favorably to the negative $24.6 million reported for the final quarter of its 2021 fiscal year. And then there is EBITDA. Management does not actually report this number, so I calculate it myself. As part of it, I add back share-based compensation. Using this approach, the metric has also been all over the place, with its first worsening between 2018 and 2020 from negative $37.6 million to negative $351.8 million. In 2021, it came in positive to the tune of $30.9 million before coming in at $124.1 million in 2022. In the latest quarter, it was negative in the amount of $110.1 million. Just one year earlier, it came in at negative $70.3 million.
Fundamentally, the picture for Nutanix is showing signs of improvement. Having said that, the future is somewhat uncertain. This is not to say that management has not offered any guidance. Because they have. At present, the firm is forecasting revenue for 2023 of between $1.77 billion and $1.78 billion, with ACV Billings of between $895 million and $900 million. But beyond that, not much has been offered in the way of guidance that can help us predict the future. We do know that the non-GAAP operating margin should come in positive to the tune of around 2%. That compares to the negative 6% seen in the 2022 fiscal year. But given the extreme volatility experienced on the company's bottom lines, this doesn't help us understand profitability moving forward.
What we do know is it shares of the company do look quite pricey using our 2022 results. Using the price to operating cash flow approach, the company is trading at a multiple of 74.2. Meanwhile, using the EV to EBITDA approach, the number is more reasonable at 39.1. But still consider that the EBITDA figure includes hundreds of millions of dollars in share-based compensation that the company would otherwise have to pay out in cash in order to keep its current workforce in place and motivated. Normally, I would like to compare a company like this to similar firms. But because of the extreme volatility on its bottom line, such an analysis might muddy the waters more than clear them. Instead, I do like to look at a scenario where we determine what kind of cash flow the company would need to generate in order to be at least fairly valued. In the chart below, you can see the operating cash flow and the EBITDA the company would need to generate in order to be fairly valued at either 10 times, 15 times, or 20 times those cash flow metrics from a market capitalization or an enterprise value perspective. At a higher end of the spectrum, this may not look unreasonable. But at the same time, it does also imply that the company will have to spend a good deal of time getting there.
Takeaway
Operationally speaking, I suspect that Nutanix will continue to create value for its investors and for its clients. The company is likely to grow for the foreseeable future, but this doesn't mean that it makes for a great prospect at this moment. Yes, management is succeeding and improving bottom line results. But I would argue that the company still has a lot of work to do just to be fairly valued. When it comes to investing, even a company that can and will achieve some target may not be the most sensible to invest in when there could be lower-hanging fruit. And that is what I see in this case. Nutanix may go on to be a good investment opportunity. But given the pricing and what the company would need to achieve in order to get to fair value, I would argue that there are better prospects that could be had today.
For further details see:
Nutanix Q4 2022 Release: Great Growth But Still Speculative