Nutanix Stock Looks Attractive At $22

by Trefis Team
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Despite rallying more than 40% since the lows seen on March 23, we believe Nutanix’s stock (NASDAQ: NTNX) has much more growth potential. The stock has rallied from $16 to $22 off the recent bottom – largely mirroring gains in the broader S&P 500 index, which also moved 40%. The stock is slightly ahead of the overall markets as investor sentiment is favorable towards companies that offer solutions to enable remote working. However, the stock is still down 27% from levels seen in late 2019.

While the company has seen steady revenue growth over recent years, its P/S multiple has decreased. We believe the stock is likely to see some upside despite the recent rally and the potential weakness from a recession driven by the Covid outbreak. Our dashboard What Factors Drove 35.7% Change in Nutanix Stock between 2017 and now? has the underlying numbers.

Some of this rise over the last two years is justified by the roughly 46% growth seen in Nutanix’s revenues from 2017 to 2019. However, its losses have also increased from $379.6 Mil in 2017 to $621.2 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 changed from 5.5x in 2017 to 4.5x in 2019. While this key metric is down to 3.5x now, there is an upside when the current figure is compared to historical levels.

So what’s the likely trigger and timing for further upside?

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. 

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 vs. historic valuations become important in finding value. 

While Nutanix’s stock presents some upside potential, which S&P 500 component stocks are likely to outperform the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

 

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