Nutanix: Enterprise Cloud Potential With Ongoing Problems Sep. 4, 2017 12:33 AM • #NTNX Summary Nutanix easily beat FQ4 estimates. The lack of leverage in the fast revenue growth rates has rattled investors so far. Hyperconverged infrastructure potential makes the stock worth the risk. A path to profits is needed to reward investors. As #Nutanix (NTNX) grows into an enterprise cloud leader, the stock actually continues to trade far below its post-IPO highs. The biggest issue with the company in the current market has been the lack of progress towards becoming profitable.
The FQ4 results were solid for a big $0.05 EPS beat, but the stock went nowhere. It closed the day at $22. What caught our attention is the company still has massive growth in excess of 30% for the foreseeable future, and the market originally had so much hope for Nutanix, with initial trading above $40.
The datacenter enterprise cloud provider generated 62% revenue growth in the last quarter. Billings grew by 40%, but the number that will detract most investors was the substantial $0.33 loss.
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Once going public, a company needs to get close to being profitable or the investment community will lose interest. One only needs to review the below chart to see how EPS estimates fell all of last fiscal year. Once the calendar flipped to FY18, the numbers started falling again.
NTNX EPS Estimates for Current Fiscal Year data by YCharts
The biggest key to the story is that Nutanix is on a pace to lose close to $1 per share in the next fiscal year or FY19. The market can handle growth investing, but a company needs to be closer to breakeven to get a lot of respect.
For an enterprise cloud provider shifting towards software, cash flows are typically a better indication of the investment thesis. What one wants to see is a company generating positive cash flows in order to sustain the growth phase that includes reported losses. The investor data sheet providers the details here.
The company is generating positive operating cash flow. One might want to see some larger cash flows, but $14 million for the year is a positive step in comparison to FY16. The free cash flow situation is a concern. Nutanix lost $36 million in FY17 and virtually equal to the $39 million loss from the prior year.
Note that the stock now has an EV around $3 billion, with a revenue target of over $1 billion in the current FY. Nutanix guided to FQ1 revenues of $245 million at the mid-point versus analyst estimates down at $231 million, so growing revenues isn't a problem.
The disappointing part is that nearly 50% revenue growth for the quarter isn't generating any leverage. Sure, the company continues to beat quarterly estimates, but the guidance of a $0.37 loss is right on par with the loss from last FQ1. Beating by $0.05 and reporting a $0.32 loss just isn't what the investment community wants these days with that type of revenue growth.
The key investor takeaway is that Nutanix is a cheap cloud play based on P/S multiples. For the investment to pay off, the company needs to not only beat FQ1 results by the typical $0.05 to show the progress, but guidance this time also has to include a path to reduced losses going forward.
Own Nutanix at this price for the promises of enterprise cloud computing. Though, don't overstay your welcome if the company can't figure out how to cut losses while ramping up revenues.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
https://seekingalpha.com/article/4103867-nutanix-enterprise-cloud-potential-ongoing-problems
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