Nutanix (NASDAQ:NTNX) is back on track.

For the second quarter in a row, the stock was flying higher on the strength of an earnings report as the company's transition to a subscription-based Software-as-a-Service (SaaS) business appears to be gaining traction. In just two years the tech company has gone from selling hardware to selling software, and now cloud-based software, through a subscription model.

The company, which focuses on cloud-based infrastructure and hyper-convergence (the combination of storage, computing, and networking), beat estimates and its own guidance on both the top and bottom lines. Overall revenue in the fiscal first quarter rose 0.5% to $314.8 million, a reflection of the move away from hardware and traditional software revenue, which comes in one lump sum. However, that was well ahead of the analyst consensus at $306.4 million. Similarly, its adjusted loss per share widened from -$0.13 to -$0.71, but that was also better than expectations of -$0.75.  Its losses grew as it missed out on legacy sales from hardware and one-time software sales and ramped up spending on sales and marketing by 48.5% to $298.8 million to drive subscription sales. CEO Dheeraj Pandey said the company would continue to grow its sales force to strengthen the subscription business as long as the returns warrant it. 

Those numbers alone, which include flat revenue growth and expanding losses, may not seem to depict a company in the midst of a successful transition. The company's future, however -- particularly its application of a subscription business model -- presents a much more promising picture.

A rendering of an increasing bar chart in cloud images.

Image source: Getty Images.

What a cloud company looks like

In the fourth quarter, Nutanix's subscription revenue jumped 72% to $218 million in the period, making up 69% of revenue or 73% of billings. The company has set a goal of 75% of billings coming from subscriptions by the end of the year. Deferred revenue, which may be the best representation of future growth as it includes payments that subscribers have already committed to, was up 39% in the quarter. 

Nutanix stock has started to dig itself out of a hole it fell into earlier this year as its financial performance worsened when it began the pivot to the subscription model. The chart below shows the stock's performance over the last year.

NTNX Chart

NTNX data by YCharts

As you can see, the stock has nearly doubled in the last three months on the back of two strong earnings reports, but it's still down more than a third from its peak in February. At one point last year the stock briefly traded above $60.

Considering that Nutanix's revenue is functionally growing by between 39% and 72%, depending on which metric you choose, the stock looks like a bargain compared to its high-flying SaaS peers, as it trades at a price-to-sales ratio of just 4.5.

The chart below shows how that compares to some of the better known SaaS companies out there.

Company Market cap Price-to-sales ratio Revenue growth* Price-to-earnings ratio
Nutanix $5.5 billion 4.5 39%-72%** Not profitable
Shopify (NYSE:SHOP)
$36.81 billion 26 44.6%

2,438

Okta (NASDAQ:OKTA)
$15.4 billion 31.6 48% Not profitable
Slack Technologies (NYSE:WORK)
$12.2 billion 24.1 57.5% Not profitable

NOTE: *Revenue growth is for the most recent quarter. **Nutanix revenue growth figures vary based on which revenue metric is used, as explained in the story. Source: Yahoo! Finance

As you can see Shopify, Okta, and Slack are all growing at roughly similar paces to Nutanix's subscription businesses. None of these other companies is significantly profitable, yet they all trade for sky-high price-to-sales valuations. The market has been bullish on cloud stocks, especially those with leadership positions in their respective categories, as Shopify enjoys in the e-commerce software space, Okta in identity and security, and Slack in workplace communication.

Nutanix occupies a similar position with hyper-converged infrastructure, where it is recognized as a leader by both Gartner and Forrester, two respected IT research firms, and its subscription model appears to be resonating with customers. Its dollar-based net expansion rate was 132% in the most recent quarter, meaning revenue from existing customers rose 32% year over year, and customer retention was also up 97% in the quarter. Both of those are strong indicators that customers are embracing the new subscription model and the company's new products.

Given the valuation disparity between Nutanix and the cloud-computing peers above, the stock could have a lot more room to run if the company continues to execute. Keep an eye on metrics like net expansion rate and customer retention as evidence that the company can maintain its strong subscription growth rate.