Nutanix Stock Gains 20% After Private Equity Steps In

After rallying nearly 80% since the lows seen on March 23, we believe Nutanix’s stock (NASDAQ: NTNX) might only have a little upside left. Rising from $16 to $28 off the recent bottom, the price gained more than the broader S&P 500 index, which moved 56%. These gains are ahead of the overall markets as investor sentiment is favorable toward companies that offer solutions to enable remote working. The company gained nearly 20% in value on August 27 primarily due to the announcement that Bain Capital will be making a $750 million convertible notes investment in the company. The price is currently 30% higher than levels seen at the end of FY 2017.

While the company has seen steady revenue growth over recent years, its P/S multiple has decreased. We believe the stock is likely to have little upside after the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard What Factors Drove 29% Change in Nutanix Stock between 2017 and now? has the underlying numbers.

Looking at the bigger picture, some of this rise over the last two years is justified by the roughly 55% growth seen in Nutanix’s revenues from FY 2017 to FY 2020 (ended July 2020). However, its losses have also increased from $379.6 Mil in 2017 to $872.8 Mil in 2019. The jump in net losses is mainly due to an increase in sales & marketing expenses coupled with higher investment in research & development.

Nutanix’s P/S multiple remained flat at 3.3x in July 2017 and July 2020. This key metric is up to 4.1x now, due to the benefit from higher remote working and upcoming new investment.

Effect of Coronavirus

Nutanix is a cloud computing company that sells hyper-converged infrastructure (HCI) software, cloud services (like Desktops as a service, Disaster Recovery as a service, and cloud monitoring), and software-defined storage. It derives the majority of its revenues from licensing its solutions. The ongoing coronavirus pandemic is likely to affect its revenues as businesses are curtailing or postponing IT spending. Further, the economic slowdown is likely to hurt many potential and existing clients, resulting in re-negotiation of payment terms and lengthened sales cycles. Additionally, Nutanix may also face issues like supply chain disruption and logistics hurdles, which may hamper its capability to service its clients. On the flip side, though, the company should also benefit from the current crisis due to the increased demand for its remote working solutions – virtual desktop, desktop-as-a-service, and end-user computing. Further, for FY 2020 (ended July 2020) the company reported revenue of $1.3 billion, up 6% y-o-y while Gross margin went up by 300 basis point to 81%. 

In any case, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. 

So, while Nutanix seems to have little upside in the near term, what if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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