Nutanix Impresses With First Reported Quarter, But Current Valuation Still Daunting

Kulbinder Garcha of Credit Suisse reiterated his Outperform rating and $38 price target on shares of Nutanix Inc NTNX, whose first quarterly report as a public company showed better-than-expected results, with second quarter guidance also topping consensus.

The key driver was billings, which grew 87 percent to $240 million on outperformance of the Federal sector and a few large OEM deals.

“We believe a sizable TAM, an effective sales motion, and a well-considered business model that relies upon software IP should lead to strong, sustained financial performance,” Garcha wrote in a note.

Garcha pointed out increasing software contribution and estimates software has contributed about 8.5 percent of total revenues this quarter, 1 percent higher than the previous quarter.

Over long term, the analyst expects software contribution to 33 percent, supporting gross margins above 70 percent over time, with the help of OEM deals with Dell and Lenovo and MITF arrangements with Super Micro Computer, Inc. SMCI and Cisco Systems, Inc. CSCO.

Garcha also highlighted Nutanix’s unique technological advantage in the form of hyperconvergence, while the cost savings and improved agility should grow the end-market opportunity.

“We believe the company's proven sales model coupled with strong customer growth will drive robust revenue growth to $764mn/$1.2bn in FY17/FY18 (72%/51% yoy),” Garcha continued.

However, the company’s current valuation is high. In fact, Garcha believes shares could touch as much as $49 in an upside scenario.

“We acknowledge there could be meaningful risk in near to medium term, as the stock is highly valued and market will closely watch its growth profile and margin dynamics,” Garcha added.

Despite strong results, shares of Nutanix were trading in the red. At last check, they fell 2.96 percent to $33.08.