Nutanix: Upgrade To Buy As I Am Very Impressed With Execution So Far

Overview

Notice that I beforehand rated a maintain ranking for Nutanix (NASDAQ:NTNX), because the valuation has already mirrored what I assumed was a good worth for NTNX and that the chance/reward state of affairs is not enticing. Seems, I was incorrect on the place the “honest valuation” is for NTNX, because the sturdy enterprise efficiency continued to push valuation to new heights. With the inventory now buying and selling at 6.4x ahead income, my suggestion for NTNX is a purchase ranking, as I’m very impressed with the execution and progress alternatives forward for NTNX. Utilizing a long-term DCF mannequin to raised seize the potential progress and FCF technology capabilities, I obtained to an intrinsic share value goal of $77.

Latest Outcomes & Updates

As I mentioned beforehand, I stay optimistic concerning the enterprise fundamentals, and certainly, NTNX continues to ship very sturdy outcomes. In 2Q24, NTNX reported non-GAAP income of $565.2 million, representing a progress of 16%, largely pushed by energy in renewals. NTNX additionally confirmed sturdy progress in managing prices, the place its adj gross margins got here in at 87.3%, resulting in an enlargement of adj working margins to 21.9% (which additionally reveals the working leverage that’s embedded within the enterprise). This sturdy execution additionally gave administration the arrogance to boost steerage throughout the board. FY24 income steerage was raised by $25 million, which is greater than the quantity that NTNX has overwhelmed in 2Q24 (2Q24 income was guided for $550 million on the midpoint), suggesting that administration is anticipating (or is already seeing) sturdy demand that might push 2H24 efficiency larger than beforehand anticipated. Gross and EBIT margin targets had been additionally raised by 50bps to 85.5% and 100bps to 13%, respectively, on the midpoint.

This can be a very spectacular quarter for NTNX that has led me to vary my views on the enterprise and the way a lot the share value is value. Whereas the headline figures had been sturdy, my view is that the underlying energy is seen within the 23% y/y ACV billings progress (got here in at $329.5 million), which got here in method forward of what the 2Q24 information was implying (utilizing income to billing ratio), primarily pushed by very sturdy renewal efficiency that basically speaks nicely of the stickiness in NTNX merchandise. NTNX not solely noticed higher renewal economics and higher on-time renewals, in addition they benefited from some early and co-terming of renewals, which I imagine speaks very well of NTNX go-to-market efforts in stepping out early to persuade prospects to resume. And, notably, it additionally speaks nicely of the stickiness of NTNX’s product. My view is that, usually, when such contracts come up for renewal, firms are “pressured” to choose: (1) renewal at no matter charges the seller is charging, or (2) discovering one other vendor. On this case, it seems that prospects didn’t discover any purpose to change.

Due to this energy in execution, it gave me confidence that NTNX can efficiently pursue the expansion alternatives out there. Particularly, it’s NTNX’s capability to seize the VMware alternative, for which administration famous that the pipeline is substantial and rising and is a multi-year alternative. I’m bullish on this VMware alternative as a result of the acquisition drives a secular tailwind to NTNX, as prospects that at the moment are beneath VMware are “pressured” to decide to remain on or swap on condition that Broadcom is the proprietor at this time. Whereas early, NTNX has already seen a rising quantity of bigger offers within the pipeline, and I count on NTNX to proceed rising this pipeline given NTNX investments in companion and buyer incentives to drive share positive aspects.

Yeah, why do not I begin, Jim, and Rukmini can provide you coloration on the pipeline. So, initially, I feel, as you mentioned, I imply, there are important issues from VMware prospects, relating to the Broadcom acquisition. And we predict that it is a important multi-year alternative for us to win new prospects and to realize share.

Now, attending to your query a bit right here, the timing and magnitude of those offers is a bit unpredictable. Our pipeline is kind of substantial and rising. Now, for various causes, we count on contributions to the chance to construct regularly, proper? And listed here are the explanations. First one, Jim, is that many purchasers signed multi-year ELAs, enterprise agreements, with VMware previous to the deal closing, three to 5 years. So, it buys them a while to make choices.

The second, changing from VMware three-tier accounts or legacy storage accounts, which is an efficient chunk of VMware footprint, in lots of instances requires a refresh of their storage and our servers, proper, one of many two, which might additionally influence the timing of the potential software program purchases that they might make with us. Okay?

And the final piece is, like, with all these accounts, we usually have a land and increase movement. So, the primary deal may very well be smaller, after which there’s a number of potential for enlargement additional than that. From: 2Q2024 earnings name

What additionally gave me an additional layer of confidence in NTNX’s capability to pursue this share-gain alternative is the progress in partnership with Cisco. Administration famous that the joint providing is driving strong buyer curiosity and has already led to a number of new wins in 2Q24. This might doubtlessly result in an upside shock for FY24, as a modest contribution has been embedded in FY24 steerage. Nonetheless, I’m anticipating a stronger contribution from FY25 onwards.

I imagine these progress drivers are enormous sufficient to overwhelm the weak macro setting about which many buyers are nervous at this time. Administration additionally mentioned that demand continues to be secure in comparison with earlier quarters and highlighted the modest elongation of gross sales cycles. Importantly, they famous that companies are prioritizing digital transformation and infrastructure modernization initiatives, which suggests there are not any structural adjustments to the secular tailwinds that NTNX advantages from. Lastly, I feel NTNX FCF’s efficiency actually reveals that they’re on observe to proceed gushing out extra cash. This may be seen within the information as nicely. For FY24, the FCF information was revised upwards from $420 to $440 million, a rise of 350bps within the FCF margin. It’s value mentioning that the FY24 FCF margin of 20% is already touching the high-end of the NTNX FY25 goal of 17-21% margin (talked about in the course of the earlier analyst day), which suggests there’s a actual probability for NTNX to exceed the FY25 targets.

Valuation And Threat

In contrast to my earlier mannequin, I’m utilizing a long-term DCF to worth NTNX to raised derive the intrinsic worth of the enterprise. Utilizing a relative mannequin is simply too myopic, as historic multiples don’t precisely mirror the present fundamentals of NTNX enterprise, which have improved so much since years in the past. Utilizing the administration FY24 and FY25 information (offered in the course of the earlier analyst day), it’s assumed that income will attain ~$2.5 billion in FY25 (implying 16% progress from FY24). Given the execution to date and pipeline alternatives, I assumed NTNX might maintain its 16% progress within the progress years by means of FY29, adopted by a gradual discount in progress to 2% (inflation price) in FY34. As for FCF, I modeled NTNX to proceed seeing FCF margin enlargement over the long run, anchoring the exit FCF margin by benchmarking massive, mature tech firms (Oracle on this occasion). Pre-covid, ORCL reported round 32% FCF margin, and on condition that NTNX is already at 20% FCF margin and has an analogous gross margin profile, I feel NTNX can obtain 32% as nicely. Utilizing my progress and margin assumptions together with a reduction price of 10%, I obtained to an intrinsic worth of $77, which is 21% larger than the place NTNX is buying and selling at this time.

Threat

One of many key progress drivers is the partnership with Cisco. Whereas traction to date is sweet, notice that Cisco has a number of partnerships with many different gamers, and there’s no assure that Cisco will at all times prioritize promoting NTNX merchandise. If Cisco views one other firm’s product as a greater one, it might result in decrease gross sales for NTNX, which might impede progress.

Abstract

Summarizing this submit, the advice for NTNX is a purchase ranking, and the primary purpose is due to the sturdy execution that NTNX has continued to indicate. Within the current quarter, NTNX exceeded expectations with sturdy income and billing progress and margin enlargement. Plainly NTNX can proceed to develop given the VMware alternative and Cisco partnership. Notably, this progress comes with enhancing FCF margin, which is already monitoring nicely towards the FY25 goal set out in the course of the earlier analyst day.