What happened
Shares of Nutanix (NTNX +2.25%) dropped 20.1% this week, according to S&P Global Market Intelligence. The hybrid cloud company reported solid growth for its fiscal third quarter, but the results were well below the consensus analyst expectations. Shares opened down 35% the day following its report and are down around 20.1%, as of this writing.
So what
On May 25, Nutanix reported earnings for the three months ending April 30. Revenue grew 17% year over year to $404 million, with annual recurring revenue (ARR) up 46% year over year to $1.1 billion. Free cash flow was a negative $20.1 million, an improvement from a negative $70.5 million a year ago, which shows the operating leverage Nutanix is slowly obtaining with its business model.
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While these numbers looked fine, investors sold off Nutanix stock hard the day following the report. Why? Simply because its revenue didn't meet consensus analyst expectations.
Going into the report, Wall Street was expecting $438.5 million in revenue this quarter, well above what Nutanix actually reported. This difference in expectations vs. the actual results is why Nutanix stock fell so much this week.
Management blamed supply chain issues at the end of the quarter for the revenue miss, stating that the environment is currently tricky for its hardware partners. Investors should be watching this in the coming quarters to track whether the situation is getting better or worse and evaluate when this lost revenue may come back.
Now what
For the full fiscal year that ends in July, Nutanix is expecting revenue between $1.535 billion and $1.555 billion. The company has a market cap of $3.64 billion, so the stock trades at a forward price-to-sales ratio (P/S) of 2.4, assuming it hits the midpoint of this guidance range. Of course, with the uncertainties around the company's supply chain, it's hard to have any confidence the company will hit these numbers.
However, with high gross margins north of 80%, a P/S below 2.5 could be cheap if Nutanix keeps growing revenue in the double digits and starts generating positive free cash flow. The stock is down 50% year to date and is way off its highs less than a year ago. If you believe in the long-term viability of Nutanix's hybrid cloud strategy, now could be a good time to start a position in the stock.
