2 Reasons to Like NTNX and 1 to Stay Skeptical

What a brutal six months it’s been for Nutanix. The stock has dropped 47.9% and now trades at $39.85, rattling many shareholders. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Given the weaker price action, is this a buying opportunity for NTNX? Find out in our full research report, it’s free.

Why Does Nutanix Spark Debate?

Originally pioneering hyperconverged infrastructure to break down traditional data center silos, Nutanix (NASDAQ:NTNX) provides a unified software platform that enables organizations to run applications and manage data across private, public, and hybrid cloud environments.

Two Things to Like:

1. Elite Gross Margin Powers Best-In-Class Business Model

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Nutanix’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 87.1% gross margin over the last year. That means Nutanix only paid its providers $12.87 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Nutanix has seen gross margins improve by 3.3 percentage points over the last 2 year, which is very good in the software space.

2. Customer Acquisition Costs Are Recovered in Record Time

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Nutanix is extremely efficient at acquiring new customers, and its CAC payback period checked in at 20.1 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Nutanix more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

One Reason to be Careful:

Weak Billings Point to Soft Demand

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Nutanix’s billings came in at $748.9 million in Q4, and over the last four quarters, its year-on-year growth averaged 10%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers.

Final Judgment

Nutanix’s merits more than compensate for its flaws. After the recent drawdown, the stock trades at 3.9× forward price-to-sales (or $39.85 per share). Is now the right time to buy? See for yourself in our comprehensive research report, it’s free.

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