Nutanix (NTNX -1.52%) seemed to be on the cusp of breaking out at the end of 2020 thanks to the tech company's transition to a subscription-based business model and the growing demand for hyper-converged cloud infrastructure (HCI). Not surprisingly, Nutanix stock has beaten the broader market so far this year on the back of strong quarterly results.

Nutanix share prices touched a two-year high in late June after management painted a bright picture of its prospects on the recently-held investor day. Wall Street has also become bullish about Nutanix stock as at least seven analysts from investment firms have raised their price targets. All of this indicates that Nutanix is a top cloud stock to buy right now, and investors should consider going long if they haven't done so already. Let's see why.

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Nutanix is benefiting from a tremendous opportunity

Nutanix operates in the rapidly growing HCI market that's gaining tremendous traction because of its scalability, ease of deployment, and lower costs. According to a third-party estimate, the global HCI market's revenue could jump from $7.8 billion at the end of 2020 to more than $27 billion by 2025, registering a compound annual growth rate of 28% through the forecast period.

Not surprisingly, Nutanix is witnessing a sharp growth in its contract value. The company exited Q3 with an 18% year-over-year increase in the annual contract value (ACV) of its billings to $159.9 million, which exceeded the higher end of its guidance range of $150 million to $155 million. Nutanix calculates ACV by dividing the total contract value by the term of the contract.

The run-rate ACV, which represents the sum of the ACV of all contracts that were in force at the end of the quarter, increased 25% year-over-year to $1.45 billion. It is worth noting that these metrics grew at a much faster pace than the company's overall revenue, which increased 8% year over year in the third quarter to $344.5 million.

Person holding an outline of a cloud.

Image source: Getty Images.

The terrific growth in Nutanix's ACV is a result of a sharp increase in customer count and spending. The company finished the third quarter with 19,430 customers, a 17% year-over-year jump. Even better, the number of customers with lifetime bookings (LTB) of more than $1 million increased nearly 28% year over year to 1,433. Nutanix had 81 customers with LTB over $10 million, up 27% from the prior year. The number of customers with LTB between $5 million and $10 million stood at 144, up 36% year over year.

The higher spending by Nutanix customers and an average contract term of 3.3 years should ensure robust top- and bottom-line growth for the company in the long run. This is evident from the fact that Nutanix's gross margin has been growing at an impressive pace since the company's switch to a subscription-based business model toward the end of 2017.

NTNX Gross Profit Margin Chart

NTNX Gross Profit Margin data by YCharts

Subscriptions accounted for 89% of the company's total revenue last quarter, up from 82% in the prior-year period. Nutanix's subscription revenue grew nearly 18% year over year, while revenue from legacy sources such as hardware and non-portable software declined substantially. Improved revenue from the subscription business helped Nutanix raise its non-GAAP gross margin by 100 basis points to 81.7% during the quarter, which means that there is still room for growth.

All set to step on the gas

Nutanix anticipates double-digit percentage revenue growth this quarter on the back of a low- to mid-20% increase in the run-rate ACV over the year-ago period. What's more, the company anticipates ACV billings for the entire year to fall between $590 million to $595 million, up around 18% from fiscal 2020.

Analysts expect these improvements to reflect positively on Nutanix's revenue and earnings next year. Its top line is expected to jump nearly 14% next fiscal year, up substantially from this year's anticipated growth of just 4.5%. Meanwhile, the company expects an annual ACV billings growth rate of 25% through fiscal 2025, which isn't surprising as it anticipates its total market opportunity to expand from $39 billion last year to $61 billion by 2025.

The bottom-line performance should also keep getting better in the long run as Nutanix dials down its expenses. The company aims to bring down sales and marketing costs from 79% of revenue in the last fiscal year to a range of 43% to 47% of revenue by fiscal 2025, driven by higher renewals and improved sales efficiency that should lower customer acquisition costs. As a result, Nutanix expects to swing to an operating profit of $150 million to $350 million by fiscal 2025 as compared to an estimated operating loss of $315 million this year.

So, it can be safely concluded that Nutanix is just getting started and looks primed for more upside, making it a top growth stock to buy right now.