Trying To Balance A Positive View On Nutanix With An Already Steep Valuation

Goldman Sachs has started coverage of Nutanix Inc NTNX with a Neutral rating and $30 price target, as rich valuation prevents the brokerage becoming bullish on the stock despite being positive on the fundamentals.

Shares of Nutanix, which are up 86 percent since the September 30 IPO, are currently trading at a 6X EV/S multiple on Goldman’s CY17 estimates. The price target of $30 is based 85 percent on 6.0X CY17 estimated EV/S, and 15 percent on M&A value at 7.2X NTM EV/S.

“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 percent), and significant operating leverage (losing money currently but targeting 15–18 percent operating margins longer-term),” analyst Simona Jankowski wrote in a note.

Jankowski also considers Nutanix a potential M&A target due to its estimated 30 percent market share in hyperconvergence, which is the biggest trend in IT since public cloud, as it combines server and storage in a single box. This lowers upfront cost and maintenance expenses.

Related Link: Strong End-Customer Demand And Industry-Leading Billings Growth Seen At Nutanix

“We estimate that 20 percent of IT infrastructure (a $100 billion TAM) will be delivered via hyperconvergence in the next 10 years, representing a $20 billion market, up from a $2 billion market today,” Jankowski noted.

In addition, the analyst projects software-only billings to grow to over a third of the total over time, thereby boosting margins. The company's long-term gross margins targets are in the 63–65 percent range, not far above the current 61 percent level.

The analyst expects revenue to grow at a 45 percent CAGR in FY16–19 and sees operating margin expansion from the current -31 percent to -6 percent in FY19.

At last check, Nutanix was down 1.75 percent at $29.25.

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