Morgan Stanley: Nutanix Investors Will Ultimately Reward Business Investments

Nutanix Inc NTNX shares were slipping Friday morning in reaction to the fiscal fourth-quarter results released after the close Thursday. 

The Analyst

Morgan Stanley analyst Katy Huberty maintained an Equal-weight rating on Nutanix and increased the price target from $55 to $57.

The Thesis

Expense growth at Nutanix was directed toward better segmenting the salesforce; improving the core platform; multicloud software; and future services, Huberty said in the Friday note. (See the analyst's track record here.) 

The business investments led to a sharp reduction in Morgan Stanley's EPS and FCF estimates for 2019, the analyst said. 

Yet Huberty said investors may do well to focus on the company's top-line and billings growth momentum near-term, especially due to stronger-than-expected software and support billings growth, accelerating HCI market growth and positive customer and partner feedback on the Nutanix software roadmap.

The investments are self-funded with the company's FCF in 2018, while 2019 is likely to be FCF-neutral, the analyst said.

Although the company's guidance that calls for Q1 revenue of $295 million to $310 million and billings of $370 million to $390 million appears soft, Huberty said the shortfall relative to her estimate is due to the faster run-off of hardware revenue and her 12.5 times bill-to-revenue ratio estimate, which is below the guidance for 12.6 times.

Morgan Stanley projects that Nutanix can sustain 40-percent billings growth over the next two years.

" ... We think investors will ultimately reward the company for investing and modestly raise [the price target] to $57," Huberty said. 

The Price Action

Nutanix shares have gained about 72 percent year-to-date.

The stock was slipping 6.8 percent off the open to $56.66 Friday. 

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