Nutanix Stock: A Leader In The Infrastructure Software Space (NASDAQ:NTNX)

Nutanix: Market shares gains, a strong core market and a dash of AI make for a tasty and p

Holders of Nutanix (NASDAQ:NTNX) shares this year might complain about whiplash. The year started well for the shares with a strong rally that lasted until mid-February; the stock appreciated by 40% through early March, at which point it consolidated for a few weeks, prior to reaching an all-time high at about $74 at the end of May. Then, in the wake of conservative guidance at the time quarterly earnings were released, the shares fell precipitously losing 1/3^rd of their value in less than a week, before a 25% bounce back in just a few days in early July. The next valuation twist came as the overall market pivoted away from its focus on all kinds of AI hardware companies, the shares fell, almost in a straight line, with the share price retreating by 20%. Even by the standards of the notoriously volatile tech sector, this performance has been something of an outlier. And now what?

This is decidedly not an article that attempts to call market pivots. They seem to change directions almost as rapidly as the weather can change in New York. It seems an impossibility to attempt to provide insight into all of the mood swings, or computer generated swings perhaps better said, that have animated all these pivots, and which have been a principal component in the volatility of Nutanix shares.

Currently, investors seem to have soured on investments that they perceive to be in some ways related to AI. To an extent, shares of Nvidia (NVDA) are a proxy for this type of sentiment. Nutanix is seen in part as part of the universe of stocks thought to be AI hardware plays. Nutanix is enjoying growth from many sources, and AI is but one of those. Over time, AI is likely to be a more substantial component of its growth story.

Analog trading is a fact of life and needs to be accepted. There is some irony here; one of the Nutanix GenAI offerings actually facilitates the deployment of trading systems based on analogs. But this article considers the growth potential for Nutanix on a holistic basis of which AI is but a part-a small part today.

Just for the record, Nutanix is not an AI hardware company; it is in fact no hardware company at all. It has been a few years now since the company has even sold hardware on a pass through basis. It doesn’t sell hardware and it doesn’t use GPUs except as part of its ongoing development process.

Nutanix is a software company. It is probably the market leader in selling hyper-converged solutions within the enterprise. For those interested, here is a standard definition of hyper-converged to provide some context for the balance of this article.

While Nutanix has a SaaS revenue model these days, its solutions are designed to be deployed in a hybrid multi-cloud architecture. While about half of the company’s revenues come from its services component, it still derives significant revenues from support and license, although the proportions are changing rapidly. Again, for readers unfamiliar with the Nutanix story, “hyperconverged” is a software architecture that dramatically enhances the performance of the compute capabilities of commodity servers and it also improves the efficiency and real capacity of storage arrays. It is a market pioneered by both Nutanix and its archrival, VMware. The hyper-converged technology is still the cornerstone of the Nutanix offering, but over the years it has enhanced its footprint substantially.

One such opportunity is in the hypervisor space. Hypervisors are software that creates and runs virtual machines. The hypervisor market itself is substantial and fast growing. Estimates put the current market size at $7.5 billion with an estimated multi-year CAGR of almost 30%.

Penetrating the hypervisor market, which has been dominated by VMware for years, is more of big deal than some investors might imagine. Currently VMware has an estimated 84% share while Nutanix has a share of 2%.

Another such opportunity is that of what is called software defined storage. Here is a definition of that technology. This is another large and growing opportunity in which VMware is a target of opportunity. SDS is another large market-it’s currently estimated at $15 billion in revenues with a CAGR of 26%. Nutanix barely shows up as a competitor. Just for the record here, SDS if offered by many vendors in different shapes and flavors. We recommend two competitors with offerings in the space, NetApp (NTAP) and Pure (PSTG). Here is a brief description of the Nutanix product in the space.

There are certainly other companies who are targeting VMware now that it is part of Broadcom (AVGO). Most prominent of these is Microsoft which has purpose built migration solutions. But I believe that Nutanix is the most likely business beneficiary from market shares gains vis-a-vis VMware.

The company does have a specific AI solution called ChatGPT-in-a-Box. This offering has just gone into its 2.0 release which should broaden its appeal. At least as important for growth are the Nutanix offerings beyond its hyperconverged solutions. It has become a partner of Cisco (CSCO) – this solution integrates Cisco’s Unified Computing System hardware with the Nutanix Hyperconverged platform and is being sold by Cisco. These days, the company offers a cloud platform that runs on Microsoft (MSFT) Azure and which is available through the Azure marketplace. The company has many other partners including HPE (HPE) and Red Hat/IBM (IBM). One of its largest recent orders was from Micron (MU) which is using the company’s infrastructure to support all of that company’s manufacturing facilities.

Lost in all the debate about guidance, is the company’s opportunity to displace what has been its largest rival, VMware. 3^rd party surveys taken in the last two months of resellers suggest the magnitude of this opportunity. With VMware now owned by Broadcom, and with Broadcom instituting price increases and attenuating that company’s product road map, these opportunities are substantial and have been consistently under evaluated.

Currently growth estimates for Nutanix are underwhelming. Revenue growth is estimated to be in the mid-teens percent over the next several quarters. Based on the opportunity outlined above, coupled with the company’s ability to close mega deals, I think this estimate seriously understates the likely trajectory of the company’s most likely revenue growth. Further, the company’s strong growth in free cash flow is likely to be furthered by stronger than expected revenue growth.

In my opinion, after this latest pullback, Nutanix shares are substantially undervalued and no longer reflect the company’s opportunities and its recent operational performance. I am reiterating my buy recommendation and I believe that the company has one of the more attractive risk/reward ratios in the enterprise software space.

Q3 forward guidance: has something gone wrong or did investors misinterpret what the company was signalling?

As mentioned, Nutanix shares fell precipitously in the wake of its release of fiscal Q3 earnings, almost entirely a function of its guidance, which was reduced-sort of. Nutanix guides to ACV billings, revenue, non-GAAP gross margin and non-GAAP operating margin as well as free cash flow.

At the end of the company’s fiscal Q2, the company had guided full-year ACV billings to about $1.1 billion, revenues to $2.14 billion and for full year free cash flow of $430 million. It also guided Q3 metrics as follows: ACV billings of $270 million, revenues of $515 million, operating margins of 8% and full year free cash flow of $430 million.

Q3 ACV billings were $289 million, revenues were $525 million, and the non-GAAP operating margins were 14%. These were beats of $19 million, $10 million and 700 bps respectively compared to the levels forecast at the end of Q2.

Its new guidance for full year ACV billings is now $1.125 billion, revenues of $2.135 million, non-GAAP operating margins of 15% and free cash flow of $530 million.

So, considering the beat in Q3, the company’s forecast for Q4 ACV has been marginally increased, its forecast for revenues has been reduced by less than 1%, and its guidance for free cash flow has been increased noticeably.

The company’s largest single transaction, called out by the CEO closed, but was not included in Q3 billings. So the beat on that metric was notable given the absence of what was apparently a $50+ million transaction that will show up this quarter in terms of cash flow and ACV and is probably a principal reason as to why the company chose to raise its billings guidance for this quarter. This kind of strategic win ought to be seen as a validation of the company’s strategic vision; the company has purchased the Nutanix Cloud with database service to automate the internal database deployment for the customer. Presumably this implementation will include some part of the Nutanix Software-defined-Storage technology which would be a major validation for that technology from a leading customer who took 2 years to evaluate alternative.

The win was from a new customer and the ACV of the win seems to have been in the $50 million range. The sales cycle elongated and enlarged over a 2 year span. The specifics of that deal are such that while billings and cash will take place in Q4, the revenue recognition will only start in FY 2025.

Deal structures for the largest transactions invariably involve perturbations that extend their cycle time and usually result in larger and more complex structures that can delay revenue recognition. I think anyone with even passing familiarity with the enterprise software space will recognize the paradigm.

As the Nutanix solution portfolio has grown, its pipeline has apparently pivoted to larger potential engagements. During the call the company CFO talked about $1 million+ opportunities growing at more than 30% year on year in each of the last three quarters. Pipeline from these larger opportunities in dollar terms has grown by more than 50% each quarter so far in the fiscal year.

Forecasting the closing of megadeals is notoriously imprecise. As larger deals are now a greater proportion of the pipeline and have grown substantially, the company has taken the prudent step of estimating lower and later close ratios.

The company CFO also suggested that so far this year the company’s new and expansion ACV and ARR performance has been below amounts initially target. The implication is that renewals are running higher than anticipated since overall, ACV growth is forecast at greater levels currently than at the start of the fiscal year-by about 4%.

Obviously, I would not be writing this article if I felt that the revised guidance and comments about a shortfall in new ACV billings and ARR growth was an indication of a waning demand for what the company sells. Large deals are hard to forecast. Large deals are a rapidly growing component of the Nutanix pipeline. The company chose a prudent course in adding caution to its estimates of when the large deals in the pipeline might close. I think the 25% share price haircut that was the result of the new guidance was a substantial overreaction and provides long term investors with a substantial opportunity and I think the current pivot away from what are considered as AI companies is a further opportunity.

The Nutanix growth story; A Large and growing TAM, a growing list of high profile partners and competitive displacements

1. The growth opportunity in HCI

Most of what Nutanix currently sells is what it has always sold; On-prem hyperconverged infrastructure. While it is, today, the market leader in that space, the space itself, despite it being on-prem, is continuing to expand significantly. One third party analysis linked here projects a CAGR of almost 23% over the next several years. Actually, the growth potential for what Nutanix sells in this space is higher; this study looks at total spend as opposed to just software spend, and software spend is significantly outstripping the spending growth on commodity servers which are typically part of an HCI deployment.

The Nutanix theme for years has been to focus on solutions that tap user interest in a hybrid, multi-cloud environment. Many enterprises, while moving workloads to the cloud, and locating most new workloads in the cloud, continue to have a preponderant deployment of apps that run on-prem and this will be the case for literally decades. And most large users have deployed their cloud applications on the infrastructure of multiple cloud vendors. As a result, larger users find themselves having to modernize their data centers despite a near universal desire to get out of having to deal with issues of running physical facilities that need to be staffed and monitored.

HCI and particularly Nutanix HCI, with its ability to work with a multi-cloud environment is one way of minimizing the footprint of a datacenter, improving performance and reducing operating costs. There is still a huge amount of converged, as opposed to hyper-converged infrastructure in the world. It all needs to be replaced, and Nutanix is best positioned to reap the benefits from a replacement cycle..

2) The opportunity to gain share

For some years the market for HCI software has been a two horse race between VMWare and Nutanix. Nutanix has mainly been seen as offering more features, a better user interface with more flexibility that avoids any kind of user-lock-in. VMware has had the advantages of a broad platform of virtualized solutions extending far beyond hyper-converged solutions. I have linked here to a recent comparison between the two offerings by an industry consultant that probably is the most exhaustive study on point that I have seen.

The character of the race has now changed. VMware, has gone through multiple evolutions before finally being bought by Broadcom. Broadcom has made several software acquisitions over the years. The universal outcome has been that Broadcom’s subsidiaries wind up charging higher prices and the pace of innovation for these acquisitions has slowed. That is apparently happening with VMware.

Broadcom’s CEO has been willing to pay high prices to assemble a portfolio of software vendors. It is probably a tendentious strategy, but Broadcom has many other strategic directions beyond buying software companies, and obviously some of those have animated recent growth. But that said, in order to achieve Broadcom’s financial objectives it almost has to raise prices and delay spending on new products in order to achieve financial objectives. In turn, this strategy motivates many customers-and VMware customers, specially, to look for alternatives in the market. Nutanix is certainly the most prominent alternative to VMware’s offerings of HCI and other virtualization software.

A recent reseller survey found that many VMware customers have started to look beyond their current vendor for alternatives, particularly alternatives for hypervisors and what are called cloud solutions. The survey has the limitations of all such undertakings and was of course limited to resellers. The largest Nutanix transactions, such as the 8 figure deal cited earlier are not generated through resellers, and thus are an incomplete analysis of the competitive displacement opportunity. In addition, it appears that VMware is letting some of its smaller customers leave without any retention efforts; VMware is trying to sell some users 3 year contracts and there has been significant push back by users who simply do not to make that kind of commitment. And VMware is raising prices even at the risk of seeing downsized deals.

Saying that Nutanix stands to benefit from taking share from VMware is not particularly controversial. But like most such things, the devil is in the details. The reseller survey cited says that while Nutanix is quoting substantially more deals, actual performance of their (the resellers) Nutanix business hasn’t shown a substantial acceleration. Basically, they (the resellers) believe that their Nutanix business will see accelerated growth because of VMware displacements, that hasn’t quite happened yet.

I don’t want to claim second sight here. The published 1^st Call consensus for Nutanix percentage revenue growth shows almost no acceleration between current levels, and levels expected next year. As published, the revenue growth anticipated is 14.8% this year, and 15.9% next year. I doubt that the consensus forecast is credible and I basically disregard it in my own analysis. As a base, I expect that Nutanix revenue growth will keep up with the 22% market growth projected for the HCI space. And I expect that the market share opportunity that Nutanix can close is at least an additional $100 million next year out of an available target of more than $6 billion.

Of course bookings growth isn’t always exactly correlated with reported revenues. And the timing of the opportunity is hardly set in stone-there are many exogenous factors such as contract expiration dates, hardware refresh timing and simply moving to an opex model from a capex model which can be a difficult decision for some customers. I model based on 4 forward quarters which in this case will be all of FY ’25. The consensus for that period, as published is about $2.5 billion, while my forecast based on the above assumptions is for revenues of $2.68 billion or a difference of 7%.

As many readers are aware, VMware had historically been a Dell (DELL) subsidiary/partner. There had been some level of customers buying an entire solution from Dell and VMware; it was the preferred deployment pattern. While Nutanix has always supported those customers who used Dell servers, and Dell has been a significant hardware partner of Nutanix that partnership was significantly extended this past quarter. Some Dell customers want to reuse Dell storage while moving to the Nutanix hypervisor, and this partnership facilitates that migration. This is a new product offering that will be sold by Dell; it is expected to reach general availability status at the end of this calendar year and perhaps will have some impact on revenue growth and profitability toward the end of FY ’25.

3) Life beyond HCI for Nutanix

Nutanix is making a go-to-market push to move beyond just selling its HCI solution. Turning back to that 8 figure transaction, the customer requirement was centered on a need to automate the deployment and management of their fleet of different databases. They wound up buying what Nutanix calls its cloud platform which does automate their database deployment and automate the management of the database installation. In other words, strictly speaking, this was a deal beyond HCI. Presumably, this win will utilize software-defined-storage as part of the overall deployment.

Nutanix does not call out the contribution from specific elements of its platform. It’s probably a data point that would be of more interest to analysts of the stock than to the leaders of the business. While obviously most potential customers think of Nutanix as a provider of hyperconverged solutions, it has developed some solutions for the cloud including migration, disaster recovery and expansion (basically using virtualization technology to meet seasonal transaction demand and geographic expansion).

The company has a number of development tools that are used in conjunction with its Hyperconverged offerings that are used to create what Nutanix describes as modern applications. Lately, it has focused on providing developers working in Nutanix to enjoy a wide choice of Kubernetes as well as what it describes as APP-Centric Self-Service Tools. Micron, which made a major 9 figure purchase of Nutanix e quarters ago, says its decision was based on improvements in TCO and a much faster time to market using Nutanix pre-validated designs.

There are a number of other areas that will eventually be addressed or more completely addressed by Nutanix to extend its footprint. Besides the hypervisor, long a Nutanix offering, other areas of significance include IT automation and configuration, IT operations management, software defined storage, software defined compute, network infrastructure software and virtual client computing.

Most recently, the aggregate Nutanix revenue of these categories was a bit greater than $200 million, or about 15% of the company’s total revenues. The company’s investor presentation suggests that these components of the company’s opportunity will reach about 1/3^rd of its addressable market over the next 3 years. Some of this rapid growth will come from new and existing customers buying a full complement of Nutanix services. Some of the growth will be due to market share gains.

Like many other companies of its size, Nutanix, because of its broad range of solutions, has a platform which is its typical go-to-market offering to the enterprise these days. The two major deals called out in the most recent conference call were both platform deals and in one case a customer who had divided their installation between Nutanix and most probably VMware, chose to standardize on Nutanix and bought the full stack including the Nutanix cloud platform. In cases such as that, it can be difficult to precisely determine just how much of the booking is HCI and how much relates to the balance of the company’s offering.

In estimating a CAGR for this company, my view is that these areas beyond HCI will be significant and are underappreciated. The company’s most recent ARR growth has been reported to be 24%, and that metric excluded the impact of the company’s largest deal last quarter which probably would have added 250 bps to the growth rate.

In projecting a CAGR for this company, I think a forecast should be built on core HCI growth at close to 3rd party analyst projections of 20%+ and then should include some expectation for noticeable market share gains from VMware coupled with the growing importance of product offerings beyond the core HCI solution. While at the moment, revenue growth is lagging the growth in ARR and ACV billings, over time all of these metrics will converge-no pun intended.

Competition in the hyperconverged space

I have focused on VMware as a competitor in the space. That is simply because VMware is by far the largest competitor faced by Nutanix. As I have mentioned in previous articles, often 3^rd party analysts do not calculate market share based on the value of HCI software being sold by a particular vendor. This dramatically understates the reported market share of Nutanix, and overstates the market share for those competitors who sell both hardware and software.

Regardless of the methodology, Nutanix and VMware-or now Broadcom, seem to have a market share combined of more than 60% and perhaps even 65%. Linked here is Gartner’s list of competitors and alternatives in the space. It’s worth noting that basically two of the vendors listed here, Cisco and Dell are no longer selling competitive products.

HPE bought a vendor in the space, Simplivity, some years ago and has struggled with that offering ever since. IBM has been a competitor due to its acquisition of Red Hat, but no longer has an up to date offering. Microsoft has recently announced Azure Stack HCI. The general availability of that product was earlier this month. The company has had a less complete version of the product since 2020. As the name implies, it is part of the Azure stack. Of course, Nutanix also runs on Azure and will continue to do so. AWS also offers an HCI solution it calls Outposts.

Hyperscalers have many offerings beyond providing cloud infrastructure, particular in the database area. They are attractive on a cost basis, but almost inevitably lack features and functionality. Of course, what they lack the most is a multi-cloud capability. The Nutanix offering for the enterprise is very much focused on that company’s ability to support applications running in any cloud with single click simplicity. In addition, at this point, the availability from Nutanix of a unified platform is also a significant differentiator from the hyperscalers.

Overall, my expectation is that Nutanix will continue to be a share gainer, mainly from capturing customers from VMware, but also from smaller competitors such as HPE. I do not think hyperscaler competition will be a factor in the foreseeable future.

Nutanix and AI: A specific solution and an overall demand tailwind

The last time I wrote about Nutanix for SA, I described it as one of the pick and shovel vendors for the AI age. That is still my belief. The company offers what it calls a full AI stack which includes a curated choice of large language models using leading open-source AI frameworks. The company has a partnership with a company called Hugging Face which provides access to its library of LLMs as well as an expanded partnership with Nvidia to provide better access to the Nutanix automated AI solution. Nvidia’s AI Enterprise customers

Nutanix has a solution that it calls CPT-in-a-Box. As mentioned previously, Version 2.0 was recently announced. The first version of the product had been announced in the middle of last year. There has been considerable interest in the offering and there have been some sales, although the amount of revenue hasn’t been quantified and probably is quite small.

There has been a huge amount of FUD as to how AI is not producing real value for customers. Perhaps the recent Microsoft (MSFT) earnings release and conference call will put a dent in that kind of assertion. I think much of the FUD is just a product of journalist/analyst excess. But with the 2.0 release, some of what users are doing with GenAI is now available and can be deployed immediately. These apps include fraud detection, risk assessment, customer service, algorithmic trading, diagnostics, personalized treatment and many more.

Other included functions in the Nutanix offering include a privacy feature, a code generator and a document understanding capability. 2.0 facilitates the deployment of Nvidia NIM (NIM is a high-level programming language that has Python like syntax), a major performance enhancement for the development and deployment of complex applications.

The company hasn’t provided any specific quantification as to its expectations for ChatGPT in a box. At the moment, I consider it to be just another component of the overall Nutanix growth story, but it should be more of a specific revenue growth tailwind in the coming fiscal year.

The Nutanix business model: it’s been evolving to higher levels of profitability and free cashflow generation.

Nutanix is in the late stages of its transition to a model that is mostly composed of subscription revenues. Thus there has been some disconnect between reported revenue growth and such metrics as ARR and ACV billings growth.

In the company’s fiscal Q3, while ACV billings grew by 20% and ARR grew by 24%. These metrics excluded the large deal mentioned earlier in this article which apparently closed but is not included in the metrics above. The company reported revenue growth for the quarter of 17%. As mentioned earlier, this was outperformance across all guided metrics compared to the company’s prior forecast. In particular, the company had forecast ACV billings of $270 million and they were actually $289 million.

The company’s non-GAAP margins showed particularly strong trends. Non-GAAP gross margins were at a near record of 86.5%. Non-GAAP opex was $380 million or 72% of revenue, and this resulted in a non-GAAP operating margin of 14%. Non-GAAP opex was up just 6% year on year and up by 3% sequentially. Overall, the company had forecast 8% non-GAAP margins, and actual results were nearly double the forecast.

Nutanix has been a company with highly seasonal results. Q2 is often a high point-it encompasses the end of the calendar year. Q3 usually has lower results and that was the case this time, particularly as the quarter did not include the very large transaction in its metrics. Operating cash flow in the quarter grew by $22 million year on year, or by 30%, a function of a $47 million increase in GAAP profitability, offset in part by lower SBC expense.

The company is forecasting ACV billings of about $295 million, which would be up by less than 3% sequentially. It doesn’t specifically forecast ARR. It is forecasting revenues of $535 million at the mid-point of its forecast, up less than 2% from the Q3 level. It is forecasting non-GAAP operating margins of 9%-10%; that implies non-GAAP opex growth of more than 10% sequentially, which seems highly unlikely.

As mentioned, the company significantly increased its free cash flow forecast for the year to $530 million at the mid-point, compared to the prior forecast of $430 million. The new projection basically implies a free cash flow margin of 25% for the full fiscal year. In the interest of conservatism, I have projected a forward free cash flow margin of 23%; if the company closes some of the larger deals in its forecast, depending on deal structure, that margin could be significantly exceeded.

Nutanix does use SBC, although it is limiting new option grants and thus SBC is declining. SBC fell to $73 million last quarter, down from $82 million in the year earlier period. SBC was 14% of revenues last quarter.

Nutanix is projecting a full year non-GAAP operating margin of 15%. This suggests that it is either on the cusp, or it will have full year positive GAAP operating margins. The accounting convention requires that with GAAP profitability, all contingent shares have to be recognized in the share count. It has projected that the Q4 share count will be 302 million; as I project results for 4 forward quarters, I am using a weighted, fully diluted share count of 305 million. The recent conversion of Bain’s convertible debt to equity will not change that metric, since the dilution was part of the company’s projection of a fully diluted share count.

I think Nutanix has a remarkably attractive valuation that is unduly compressed at this time. My projection of the company’s EV/S, based on my estimate of 4 quarter forward revenues of $2.68 billion, is just 5.5X. I acknowledge that my revenue estimate is somewhat greater than the consensus, for the reasons cited earlier in this article.

Nutanix shares, based on a mid-20 percent CAGR projection and a 23% free cash flow margin, have a valuation about 35% below average. Its valuation is a bit lower than that of Pure Storage and far below the valuation of HubSpot (HUBS) and Toast (TOST), two other companies with a similar CAGR estimate.

Nutanix has often been speculated as an acquisition candidate. At current valuation levels, with strong free cash flow margins, I think the company could be a target of a P/E bid. With a current enterprise value of $14 billion, many strategic buyers might also have an interest.

Risks to the investment thesis

There are two principal risks to the investment thesis. One of these is the potential for additional macro headwind beyond those forecast by this company. Nutanix management has been talking about macro headwinds for the last 18 months at this point, and on numerous occasions management has spoken about slightly elongated sales cycles. The company’s reduced Q4 forecast, and expectations for the fiscal year starting later this week, have encompassed expectations for a difficult selling environment. Further, the company, for very good reasons, excludes potential large deals from its forecast. It has a large deal pipeline, greater than any in its history, so its forecast methodology seems appropriately conservative for the current environment.

If Nutanix does close some of the larger deals it reported in its pipeline, this is likely to have a palpably positive impact on its revenue growth forecast and margins, as well as possibly producing a stronger level of free cash flow than I have projected.

The second major risk to the thesis is the realization and timing of market share gains. Part, but certainly not all, of my thesis of above-average growth for Nutanix is that it will take share from VMware. That seems to be happening at this point, but the full benefit from that potential significant revenue tailwind is still more in prospect than reality. And the timing of securing competitive wins is hard to determine-Nutanix itself probably can’t forecast those kinds of transactions with precision.

Overall, sales execution is always a risk for a company such as this, and that is one of which I am particularly mindful given the past history of this company. That now appears to be a rearview mirror issue, but has to be considered as a risk.

Wrapping Up-Reiterating the case to buy Nutanix shares

Nutanix in recent months has had an exceptionally volatile trading pattern. Right now, despite a minor bounce, it is close to a nadir in terms of share price, and past a nadir in terms of valuation. Obviously, the progress of the shares will partially depend on market sentiment and the various pivots that favor AI hardware, and mega caps, to sentiment favoring small cap and value. Personally, I find the current trade of selling higher growth IT vendors for small-cap cyclical growth shares hard to understand-but I acknowledge the sentiment and it is one that is and will affect Nutanix shares till the next set of sentiment reversals.

The company’s cautious guidance and perhaps a negative tone on this latest conference call in terms of the current outlook have been the major factor recently in the company’s valuation compression. The fact that while the pipeline has seen overall growth, more of it is concentrated on larger deals that are difficult to forecast, particularly in terms of timing of the closing of actual transactions.

The company has become the market share leader in the hyper-converged market. It is taking share from VMware. It is significantly expanding its product footprint, and this is enabling the company to close significantly larger enterprise deals than in the recent past.

The company closed two substantial transactions last quarter that were beyond the usual size of large deals. These transactions were not accounted for in Q3 results.

Overall, Nutanix shares are valued without any expectation that some of the large deals in its pipeline will reach fruition. And they are valued without expectation that some of the company’s product initiatives in terms of its hypervisor and software defined software offerings will create revenue growth. And the company does have a real gen AI product, ChatGPT in a box, which is producing revenues now and will produce more growth in future periods.

The company has achieved significant cost discipline, with a free cash flow margin higher than I had projected. This, too, doesn’t seem encompassed in the current valuation in the shares. I reiterate my purchase recommendation for the shares at this time, and at this price.