What happened
Shares of Nutanix (NTNX 1.89%) were plunging today, down as much as 11.6% in early trading, before recovering to a 5% loss as of 10:08 a.m. ET.
Nutanix's stock had performed well compared with the overall tech sector in recent weeks, as speculation swirled that the company was in buyout talks with HP Enterprise (HPE 0.24%). However, this morning, that same speculation pointed to talks ending and HPE walking away from any deal, dashing investors' hopes for a quick payday.
So what
Nutanix is a leader in hyperconverged infrastructure, or software that allows workers to code seamlessly across multiple clouds and with software development tools such as Kubernetes.
In truth, the acquisition would have been a great fit for HPE, but Nutanix may be asking for too high a price. After all, the company did just report solid earnings on Nov. 30, with revenue up 14.6% and GAAP losses per share of $0.43. Despite headline losses on the bottom line, both figures handily beat analyst expectations.
Moreover, Nutanix's annualized recurring revenue (ARR), which is really a better proxy for the firm's growth, rose an impressive 34%, and adjusted (non-GAAP) gross margin expanded from 82.1% to 83.4% -- another good sign of increasing profitability with scale.
Moreover, after today's decline, Nutanix now trades at just 4.8 times last quarter's ARR figure, which is pretty reasonable for a software company growing that ARR 34%.
That still-reasonable price for Nutanix is likely why the stock is recovering somewhat after this morning's plunge on the initial disappointment.
Now what
The software sector could continue to struggle if interest rates stay higher for longer, as many project will happen. However, Nutanix is one of the cheaper options out there on a price-to-sales basis. So, it may still be an attractive option, as hyperconverged infrastructure should be a long-term growth industry.
That being said, while Nutanix is operating around cash flow breakeven, it's also generating hefty operating losses on a GAAP basis, thanks to its high stock-based compensation. While software companies are big fans of reporting "adjusted" numbers that ignore SBC, remember that those dilutive stock issuances to employees are a real cost to shareholders.
Therefore, for those looking for companies that may actually become profitable in the next year or two, Nutanix may continue to disappoint on that front.
