Nutanix (NASDAQ:NTNX) made a big splash when it went public in September last year. Its offer price more than doubled, as investors didn't want to pass up an opportunity to invest in a company that seemed capable of delivering tremendous upside thanks to its rampant financial growth.

However, investor enthusiasm was short-lived; shares of the enterprise cloud specialist have taken a beating because of potential competition from Cisco and Hewlett-Packard Enterprise, and weak guidance early this year. As it turns out, the young stock has lost almost half its value since its debut, though recent developments point toward a potential turnaround.

Nutanix logo

Image source: Nutanix.

Latest results have boosted investor sentiment

Nutanix stock shot up over 11% after a terrific third-quarter earnings report and guidance. The company's sales jumped 67% from the prior-year period, while the adjusted loss of $0.42 a share was lower than the Wall Street estimate of $0.45.

More importantly, the company's guidance for $215 million to $220 million in revenue and an adjusted net loss of $0.38 per share was better than the consensus forecast for $205 million in revenue and $0.39 per share of loss. Not surprisingly, the market has rewarded the stock in recent trading sessions, though investors shouldn't forget that Nutanix will be exposed to a lot of volatility based on hits and misses in subsequent quarters.

But the good news for investors is that Nutanix is setting itself up for sustainable long-term growth, by rapidly adding new customers and striking bigger deals.

More customers, bigger deals

Nutanix added close to 800 customers last quarter, taking its total customer count to almost 6,200. But Nutanix's prime focus was on adding larger accounts, as two of its deals were valued at more than $5 million, while 34 deals crossed the $1 million mark. This is a result of the company's focus on reorganizing its sales team to focus on bigger businesses that will lead to recurring long-term revenue.

What's more, Nutanix's largest customer has already crossed the $50 million mark in lifetime sales, indicating the stickiness of the company's platform. In fact, 71% of bookings during the quarter were made by existing customers as compared to 66% in the prior-year period, which should help drive down the company's customer-acquisition costs and boost margins.

As it turns out, the repeat purchases by Nutanix customers have helped reduce selling and marketing expenses to 58% of revenue as compared to 63% in the prior-year quarter. The big-ticket deals signed by the company during the previous quarter should help it lower this expense line item further in subsequent quarters, and boost its push toward profitability.

More specifically, Nutanix believes that it can reduce its selling and marketing expenses to between 29% and 32% of revenue in the long run, thanks to a drop in customer-acquisition costs and improved productivity of its sales force.

Strong deferred revenue growth will be another tailwind

Deferred revenue refers to the amount collected by Nutanix in advance for services that it hasn't yet provided to customers. More specifically, short-term deferred revenue is recognized on the income statement within 12 months, while long-term deferred revenue is recognized after a year is completed.

As it turns out, Nutanix's deferred revenue doubled year over year during the second quarter to $463 million. Of this, $207 million was in short-term deferred revenue and $256 million was long-term. Therefore, the company's deferred revenue grew at a far faster pace than its actual revenue, indicating the terrific rate of adoption of its products by customers.

Additionally, Nutanix still has a long way to go, as the hyper-converged cloud infrastructure market it operates in will be worth more than $8.5 billion in 2020, as per the company's internal estimates. By comparison, the company has generated $680 million in revenue over the past twelve months, so the market's secular growth should ideally lead to a stronger financial performance in the long run.

The Foolish bottom line

Nutanix stock will be subject to a lot of volatility depending on whether or not it meets the market's growth expectations in each quarter, but the metrics indicate that the company is pulling the right strings to make the most of a multibillion-dollar end-market opportunity. This opens up an opportunity for savvy investors to take advantage of the stock's massive drop since going public, though they will have to be patient through any ups and downs.