How Much Is Nutanix Worth?

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Nutanix (Nasdaq:NTNX) is an enterprise cloud platform provider which converges private, public and distributed cloud computing environments into a single point of control, making it easier to manage infrastructure. This hyper-converged infrastructure model has gained strong traction, leading to impressive revenue growth for the company. Nutanix crossed $1 billion in revenues for the fiscal year ending 2018 (July 2018) and also surpassed the 10,000 customer milestone. Revenues have grown by 4x over the last three years, from $240 million in 2015.

However, after the company announced its fiscal 2018 results in late August, its stock price witnessed a more than 13% decline, as reported losses were much higher than expectations. Nutanix is not profitable yet, while competitors VMware and RedHat have solid bottom lines.

Our interactive dashboard on estimating Nutanix’s valuation analyzes the fair value of the company and the potential upside to its stock. As detailed below, our price estimate for the company is $60, which is nearly 20% ahead of the current market price. In order to arrive at the company’s valuation, we address three critical questions:

Can Nutanix Continue Its Stellar Revenue Growth ?

We compare Nutanix’s revenues with two of its close competitors – VMWare and Red Hat. While Nutanix has a lower revenue base, it has grown its revenues at a spectacular growth rate over the past few years:

For fiscal 2019, we expect Nutanix’s revenue growth to be around 50%, in line with the growth in 2018 (and the company’s guidance for Q1 2019), as the company continues to expand its product portfolio, grows its customer base and moves towards subscription licenses. We expect 50% revenue growth in the Product segment (52% in 2018) and a 45% increase in the Support and Services segment (45% in 2018). However, if competitive pressures lead to lower revenue growth, the company’s earnings and valuation could be impacted significantly. Below are some of the key factors which are likely to determine Nutanix’s revenue growth in the future:

  • Nutanix is transitioning its business model by focusing on the elimination of the pass-through hardware revenue associated with the sale of its turnkey applications. The company is now focusing on selling more subscription licenses and will sell cloud-based subscription software in the future. This transition is likely to strengthen the company’s business going forward and reduce its dependence on Dell. A significant portion of Nutanix’s market share is accounted for by Dell products running its software. After Dell’s acquisition of VMWare in 2016, the latter has been increasing its market share faster compared to Nutanix. There are concerns that Dell will prioritize its own VMware product ahead of Nutanix’s software, impacting the latter significantly.
  • Nutanix is expanding its product portfolio with several acquisitions, the latest being Frame – a leader in cloud-based desktop and application delivery. The company’s acquisitions are likely to provide growth and drive shareholder value in the longer term.

You can modify our revenue growth assumptions in our interactive dashboard here.

Will Nutanix Become Profitable In The Near Future?

Nutanix’s profitability remains a concern, as the company spends more than 50% of its revenues on sales and marketing as it looks to establish itself in the industry and compete with large players. Nutanix’s competitors include players such as HPE, which acquired Simplivity – a player focused on hyperconverged infrastructure – in 2017, and Dell, which has a substantial stake in VMWare. Gaining market share from these established players is likely to be challenging for Nutanix.

What Is An Appropriate Valuation Multiple For Nutanix?

Based on its current market cap (around $8.7 billion) and 2018 revenues (around $1.2 billion), Nutanix commands a trailing revenue multiple of around 7.5x.  VMWare and Red Hat command revenue multiples in the 8-9x range, though their profitability is a factor. For the sake of conservatism, we apply a 6x forward revenue multiple to arrive at our valuation estimate for Nutanix.

By applying a revenue multiple of 6x to our 2019 revenue estimate of $1.7 billion for Nutanix, we get a valuation of around $10 billion for the company, or about $60 per share. This is around 20% higher than the current market price.

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