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This Cloud Stock Looks Set for a Rebound

By Harsh Chauhan – Updated Jun 29, 2020 at 3:30PM

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Improving financial performance could help the stock price for cloud specialist Nutanix make a comeback.

Nutanix (NTNX -1.37%) investors probably want to forget the first half of 2020 as quickly as possible. The cloud-based hyper-convergence specialist was facing growth challenges even before the novel coronavirus pandemic struck thanks to a shift in its business model.

Investors didn't think twice before hitting the sell button toward the end of February when the company revealed that COVID-19 could add another headwind and slow its business down.

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But now, it looks like Nutanix is all set to come out of mediocrity. Let's see why.

Nutanix is regaining its mojo

Nutanix's top-line growth flattened in 2019 as it made the move from a product-based business model to a subscription-based one. The company used to sell security hardware, appliances, and non-portable software, but toward the end of 2017, it decided to pivot to a subscription-based model.

The switch gave rise to short-term growth troubles. Nutanix's annual top-line growth dropped from 37% in fiscal 2018 to less than 7% in fiscal 2019 as revenue started being recognized over the lifetimes of contracts rather than all at once at the time of sale. This led to a drop-off in Nutanix's sales growth last year.

Abstract representation of computers connected to the cloud.

Image source: Getty Images

So when Nutanix management announced tepid guidance in February that called for revenue between $1.29 billion and $1.36 billion (which was ultimately withdrawn), investors were disappointed once again. At the mid-point of that guidance range, it would have delivered just 6.4% revenue growth this year, compared to fiscal 2019's top line of $1.24 billion.

But the good part is that Nutanix's latest quarterly performance indicates that its business is now turning around. The company's fiscal third-quarter revenue (for the three months ending April 30) increased 11% annually to $318.3 million. The company's software and support revenue grew at a faster pace of 18% from the prior-year period to $314.5 million.

Hardware contributed just $3.8 million to the company's top line last quarter, down from $21.8 million in the prior-year period. However, sales of non-portable (legacy) software came in at $42 million compared to $88.7 million a year ago, accounting for 13% of total revenue.

The drop in sales of non-portable software weighed on the overall top line, mitigating the impressive 55% annual growth in Nutanix's pure-play subscription segment. The company pulled in $261 million from subscriptions last quarter, accounting for around 82% of overall revenue.

This indicates that Nutanix's growth could shift into higher gear in the coming quarters as the impact of the legacy hardware and software businesses wanes further. In fact, there are a few more metrics that indicate stronger growth going forward.

All set to step on the gas

Nutanix's deferred revenue shot up 34% year over year in the fiscal third quarter to $1.12 billion. Deferred revenue is the amount of money collected in advance by a company for services that will be provided later. When the services are provided, deferred revenue is recognized on the income statement.

The impressive jump in Nutanix's deferred revenue is a clear indication that customers are signing up for long-term contracts. In fact, the company says that the average contract term in its subscription business stood at 3.9 years last quarter.

Also, Nutanix finished the quarter with a cumulative count of 16,580 customers, an increase of 26% over the prior-year period. What's more, the company's customers are also spending more money on its offerings. This is evident from the fact that Nutanix closed 59 deals worth more than $1 million in the third quarter, which resulted in a 31% annual increase in the company's total contract value of bookings.

Nutanix also said that the number of customers whose lifetime spending exceeds $1 million now stands at 1,122, an increase of 32% over the prior-year period. The company also points out that the lifetime spending by these customers increased an impressive 40% annually last quarter.

All of this indicates that Nutanix's subscription business is growing at a nice pace, and the novel coronavirus pandemic could give it an added boost. For instance, demand for Nutanix's solutions in the healthcare sector is rising as the company enables employees of health centers to work from home smoothly. The company is also witnessing an uptick in private cloud deployments in the financial services sector to ensure a smooth work-from-home environment.

All in all, Nutanix seems to be pulling the right strings to ensure long-term growth. The company operates in a fast-growing market where it is one of the leading players, which is another reason why investors looking to add a tech stock to their portfolio should take a closer look at Nutanix -- it looks primed for a turnaround.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Nutanix. The Motley Fool has a disclosure policy.

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