Having risen at Mach speed after its IPO, Nutanix stock has leveled off at around $30 per share. But there’s an argument that the company is worth even more, $43 per share, if you value it as a software-only play.
It’s a what-if scenario and not meant to be taken as a formal prediction. But it suggests how far hardware could be commoditized as hyperconverged infrastructure and the cloud become more ensconced in enterprise IT.
The theory was part of an initial Nutanix report issued today by Simona Jankowski of Goldman Sachs. She is one of several analysts that issued reports and recommendations on Nutanix today, following the mandated quiet period after the IPO.
Certainly, Nutanix sells hardware. But Jankowski’s point is that it’s commodity hardware, purchased from outside — and more importantly, Nutanix probably doesn’t make any money off of it.
“Their appliances are commodity x86 servers from Supermicro which we view as largely “pass-through” revenue that is resold at cost (i.e., zero gross margin),” she writes.
Jankowski estimates Nutanix’s revenues will be $766 million for the next 12 months. Take away those zero-margin hardware sales, and the revenue prediction drops to $545 million.
You’d think that would make for a lower stock price — but wait. Analysts’ target prices for Nutanix are based on comparisons with other hardware companies such as Arista. To carry this analysis out, you’d have to compare Nutanix’s value to software companies — Jankowski picks VMware, Splunk, and Tableau.
Those companies trade at higher levels compared with sales. Arista, for instance, trades enterprise value to sales ratio (EV/S) of about 4. (Enterprise value is roughly the value of a company’s common stock minus the company’s debt and cash.) VMware’s ratio is closer to 13.
Jankowski assigns an EV/S of 13.7 to the imaginary, software-only Nutanix — a bit of a premium to its peers, because of Nutanix’s expected growth. That yields an imaginary per-share value of $43.27.
Nutanix does deserve to trade at a premium compared with other data center equipment vendors, writes analyst Simon Leopold of Raymond James, who likewise initiated coverage of Nutanix today. But he’s rating the stock at “market perform,” saying, “the lack of upside, risks from new technology, and continued losses [lead] us to remain on the sidelines.”
About those losses. For the year ending July 2016, Nutanix lost $168.5 million, or $3.83 per share. Profitability won’t be on the horizon for fiscal 2018 or 2019, according to both Leopold and Jankowski.
Leopold believes Nutanix can at least become cash-flow-positive in calendar 2017.
Why do investors and analysts like Nutanix so much, then? Because the startup is at the forefront of what’s expected to be a fast-growing market. Nutanix was the first to market with hyperconverged infrastructure, shipping in 2011, and has built a 30 percent market share, Jankowski estimates.
Between now and 2020, hyperconverged infrastructure sales will grow 60 percent, Leopold predicts. Gartner measured hyperconverged infrastructure as a $565 million market in 2015; Leopold’s growth curve would put it at $6 billion in 2020.
“We view Nutanix as a once-in-a decade tech infrastructure story that should benefit from a long runway of double-digit growth, high gross margins (> 60%), and significant operating leverage,” Jankowski writes.