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Founded in 2009, by Dheeraj Pandey, Mohit Aron and Ajeet Singh, Nutanix, Inc. (NTNX) provides an enterprise cloud platform. In 2018, the company started transitioning from manufacturing hardware appliances to emphasizing subscription-based software solutions.
The solutions provided by the Nutanix enable organizations to migrate various workloads, such as enterprise applications, high-performance databases, end-user computing, virtual desktop infrastructure (VDI) services, container-based modern applications, and analytics applications, between on-premises and public clouds.
Hyper-Converged Infrastructure (HCI)
Hyper-Converged Infrastructure (HCI) is an integrated solution that combines computing, storage, and networking technology to provide improved data security and resource management compared to traditional infrastructure. This centralized platform helps enforce security policies and prevent data breaches, making it an increasingly popular choice for managing data.
Nutanix sells HCI technology, and as demand for secure data management increases, the hyper-converged infrastructure market is projected to grow from $31 billion in 2023 to $56 billion by 2030. This represents a compound annual growth rate (CAGR) of 25% during the forecast period. Nutanix is likely to benefit from this growth, especially if users seeking generative AI solutions increase their hybrid cloud deployment.
Generative AI, a subset of artificial intelligence dedicated to generating data, content, and lifelike simulations, is poised to drive a substantial increase in the need for both computational resources and data storage capacity. Businesses and data centers will find it imperative to invest in robust infrastructure to fully leverage the capabilities of these AI models. This scenario creates opportunities for Nutanix to innovate and offer advanced networking and storage solutions to meet the growing demands of this emerging field.
The company has outperformed the market this year, with a 32.7% increase in its stock price and is currently trading close to its 52-week high of $36.5.
The outbreak of COVID-19 had a profound impact, prompting many enterprises to postpone substantial IT projects. Nutanix encountered slower growth, averaging in the mid-single digits from FY2019 to FY2022. The company’s fiscal year ends in July.
In response to the pandemic’s challenges, Nutanix implemented a furlough in April 2020, affecting approximately 1,500 employees. Over this period, Nutanix faced a challenging multi-year phase, characterized by both a volatile macroeconomic climate and the company’s transition of its business model from a hardware company to a SaaS company. The increase in the company’s gross margin from 52% in fiscal 2014 (ended July 2014) to nearly 80% in fiscal 2022 speaks to this transformation.
Competitors
The company faces competition from key players like Dell Technologies Inc. (DELL), NetApp, Inc. (NTAP), VMware, Inc. (VMW), and Microsoft Corporation (MSFT).
Nutanix’s current CEO, Rajiv Ramaswami, took over from Dheeraj Pandey in December 2020. Interestingly, Ramaswami had previously served as the chief operating officer at one of Nutanix’s rivals, VMware.
Nutanix has a forward EV/EBITDA ratio of 25.41, which positions it at the more expensive end of the spectrum when compared to its peers. However, the company’s forward revenue growth of 14.7% is the highest among its peers.
Another interesting observation is that Nutanix maintains the highest gross margin, exceeding 80%, when compared to its peers. It is the only company among its peers with a negative net income margin of -13.66% but losses have decreased in recent quarters and free cash flow has improved.
Acquisitions & Divestitures
Nutanix has grown both organically and through strategic acquisitions.
In 2021, the company transitioned from making hardware appliances to focusing on subscription software. On May 30, 2023, Nutanix sold its Frame business unit to Dizzion, a DaaS vendor. While this business was beneficial during the pandemic, Nutanix’s strategic focus appears to be shifting. On August 28, 2023, the company made a milestone announcement with a strategic partnership with Cisco. Cisco will combine the Nutanix cloud platform, along with their UCS compute and cloud management, deeply integrated with their networking and security.
Stock-Based Compensation Plan
In the last quarter, the reported SBC (Stock-Based Compensation) expense amounted to $72.6 million, which represented approximately 16% of the company’s revenues. This figure marked a decrease from the prior year when SBC expense was $80.1 million, accounting for 21% of revenue. It’s worth noting that the SBC expense has been steadily declining over the current fiscal year.
Shares Outstanding
The diluted shares outstanding count for Q4 2023 was 286 million, up from 225 million reported in the same quarter the previous year.
On August 31, 2023, Nutanix announced that its Board of Directors has authorized the repurchase of up to $350 million of its Class A common stock, representing around 5% of its market cap at announcement. The authorization has no expiration date and may be modified, suspended or discontinued at any time and does not obligate Nutanix to repurchase any minimum number of shares.
It appears that the recent $350 million share repurchase program is an attempt to counterbalance the dilution caused by stock-based compensation.
Q4 FY2023 Results
The uncertain macro backdrop in the fiscal fourth quarter (ended July 2023) was largely unchanged compared with the prior quarter. The company witnessed a steady demand for its solutions in Q4, which was driven by businesses prioritizing their digital transformation and infrastructure modernization initiatives and looking to optimize their total cost of ownership.
Full year results
Overall, fiscal year 2023 was a significant year, marking the first year with a positive non-GAAP operating margin at 9%, significant free cash flow generation of over $200 million while growing ARR at 30% and growing revenue at 18% year-over-year.
Outlook for FY2024
Nutanix management has the following outlook for the next fiscal year.
Bottom Line
I started following Nutanix several years ago when it was still a hardware company and had just started its transformation into a SaaS company. The stock was trading in its teens back then, was expensive and the company was yet to prove that it would succeed with its transformation.
I lost track of the company for a few years and I am glad this buyback brought it back on my radar. Trading at about four times EV/Sales, the market is still valuing the company like a hardware company and not as a SaaS play with gross margins over 80%. Looking at the recent acceleration in revenue growth, I think the company is sandbagging its forward guidance and will likely perform better than expectations in the next few quarters.
Nine analysts revised their earnings estimates upwards for the company over the last 90 days.
Rapid revenue growth in fiscal Q4, net retention of 123% and the recent partnership with Cisco all bode well for the company. I plan to add the company to my watchlist and will look into doing a deep dive into the company as a spotlight idea for one of our future monthly special situations newsletters.
Welcome to edition 75 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.
The pace of buyback announcement activity dropped slightly with 8 companies announcing buybacks last week compared to 10 in the prior week.
1. Upland Software, Inc. (UPLD): $3.81
On September 1, 2023, the Board of Directors of this cloud-based enterprise software provider authorized a new $15 million share repurchase program, on or before September 30, 2028, equal to around 12.38% of its market cap at announcement.
| Market Cap: $124.41M | Avg. Daily Volume (30 days): 334,872 | Revenue (TTM): $309.91M |
| Net Income Margin (TTM): -59.49% | ROE (TTM): -62.01% | Net Debt: $256.16M |
| P/E: N/A | Forward P/E: N/A | EV/EBITDA (TTM): 9.35 |
2. PHINIA Inc. (PHIN): $28.2
On August 31, 2023, the Board of Directors of this gasoline and diesel fuel injection components manufacturer approved a new $150 million share repurchase program, equal to around 11.48% of its market cap at announcement.
| Market Cap: $1.33B | Avg. Daily Volume (30 days): 482,335 | Revenue (TTM): $3.43B |
| Net Income Margin (TTM): 6.82% | ROE (TTM): 15.62% | Net Debt: $512.00M |
| P/E: 5.70 | Forward P/E: N/A | EV/EBITDA (TTM): 3.20 |
3. Yoshiharu Global Co. (YOSH): $0.45
On September 1, 2023, the Board of Directors of this Japanese restaurant operator authorized a share repurchase program to repurchase up to 1 million shares, equal to around 7.73% of its market cap at announcement.
| Market Cap: $5.85M | Avg. Daily Volume (30 days): 92,022 | Revenue (TTM): $9.00M |
| Net Income Margin (TTM): -53.47% | ROE (TTM): -2,567.43% | Net Debt: $6.56M |
| P/E: N/A | Forward P/E: N/A | EV/EBITDA (TTM): -3.79 |
4. Nutanix, Inc. (NTNX): $34.86
On August 31, 2023, the Board of Directors of this enterprise cloud platform provider authorized a new $350 million share repurchase program, equal to around 4.77% of its market cap at announcement.
| Market Cap: $8.22B | Avg. Daily Volume (30 days): 1,924,078 | Revenue (TTM): $1.86B |
| Net Income Margin (TTM): -13.66% | ROE (TTM): N/A | Net Cash: $120.72M |
| P/E: N/A | Forward P/E: N/A | EV/EBITDA (TTM): -57.58 |
5. Brady Corporation (BRC): $56.6
On August 30, 2023, the Board of Directors of this workplace safety products manufacturer authorized an additional $100 million share repurchase program, equal to around 4.09% of its market cap at announcement.
| Market Cap: $2.8B | Avg. Daily Volume (30 days): 278,269 | Revenue (TTM): $1.31B |
| Net Income Margin (TTM): 12.71% | ROE (TTM): 17.45% | Net Cash: $55.43M |
| P/E: 15.36 | Forward P/E: 14.90 | EV/EBITDA (TTM): 10.94 |
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