Investors Should Consider Nutanix IPO For The Long Run

  • Converged datacenter vendor Nutanix has filed for an IPO and is expected to go public soon.
  • When the EMC-Dell deal is almost closed, investors might want to shift a portion of their EMC/VMW position to Nutanix.
  • With a 60% gross margin, narrowing net loss, no debt, and a bright future, the Nutanix IPO is attractive in the 5 to 7.5 P/S ratio range.

Datacenter infrastructure vendor Nutanix filed its S-1 with the SEC at the end of 2015 to raise $200M from the public after it had previously raised $300M in the private market. Nutanix is expected to be the first major tech IPO in 2016 once the market unrest calms down and breaks a long period of drought in the IPO market. Looking back on 2015, the number of IPOs dropped by 38% YoY to 170, and only 24 companies from that pool were technology companies. Since the market turbulence started back in June, the IPO market experienced a clear drop, from 35 in June 2015 down to only 2 in December, indicating that most companies wisely choose to postpone their IPOs until the market status became clearer.

Nutanix IPO is a long-awaited IPO for many tech investors, especially in light of the EMC-Dell deal, which will impact not only the broader datacenter market but Nutanix competitors EMC (NYSE:EMC) and Vmware (NYSE:VMW) directly. Nutanix provides a converged data center solution that includes computing, storage, and virtualization that allows enterprises to save on data center machines, reduce their IT spending, and save space and power. This is an excellent solution for a complex problem that many companies deal with these days when the need for server computing power and storage increases steadily.

There are many firms that have identified the trend in the IT industry are trying to offer unique solutions to reduce infrastructure costs. A few examples include Pure Storage (NYSE:PSTG) that provides flash-based storage to save on storage costs and space; Hortonworks (NASDAQ:HDP) offers a Hadoop-based solution to improve data management in data centers; EMC (NYSE:EMC) and NetApp (NASDAQ:NTAP) provide hybrid data centers that store some of the data in the cloud, and, of course, VMware leads the virtualization market and enables enterprises to use their data centers more efficiently. Nutanix's solution strives to provide customers with not just a more efficient technology than the previous generation to manage data centers but a comprehensive solution that combines several infrastructure components in a lean and effective way to save on space and power consumption.

Nutanix's solution strives to provide customers with not just a more efficient technology than the previous generation to manage data centers but a comprehensive solution that combines several infrastructure components in a lean and effective way to save on space and power consumption.

Nutanix’s biggest competitor is the EMC/VMW combined solution, which leverages the strengths of these two IT infrastructure leaders. However, from investors’ perspectives, the upcoming EMC-Dell deal that will de-list EMC will have an unclear impact on VMware stock—they might start looking into alternatives in the data center sector. Nutanix is obviously not on par with EMC/VMW in terms of size, capacity, headcount, or financial capabilities, and its valuation is only $2B, far away from the dozen of billions for EMC and VMware. Nutanix could serve as a long-run investment to replace some portions of the EMC/VMW positions in investors’ portfolios.

As shown in the chart below, Nutanix has increased its top-line revenues at a phenomenal pace of 21% QoQ and 90% YoY. Its customer list includes companies like Best Buy, Kellogg, Nasdaq, and Yahoo Japan. Like many other startups, Nutanix has a negative bottom line with more than a $38M net loss in the most recent October quarter; however, the company has an impressive gross margin of 60% and is cutting its net loss margin every quarter, bringing it down to a low of 44% in the most recent quarter.

NTNX_Chart 1_012616

The company raised more than $300M in five equity funding rounds and was valued at more than $2B in the latest series E that took place in the first half of 2014. Series E valuation reflects a 7.5 P/S ratio of the company; however, with the recent devaluations of tech unicorns led by Blackrock and Fidelity and following the difficulties recent tech IPOs have experienced, I believe Nutanix will go public at a lower valuation.

In case that valuation drops down to $1.5B, Nutanix will have an attractive P/S ratio of 5.3, taking into account a TTM revenue of $283M. Nutanix could IPO at a significantly lower price than the $13.4 series E share price since its S-1 includes an embedded ratchet mechanism that locks in at around 20% downside protection for early investors. When investors’ returns are guaranteed by the company, Nutanix can decrease its IPO valuation and adjust it to market expectations without impacting early investors’ returns.

Looking forward, as more smart devices are introduced all the time and more and more services are transferred to the cloud, the demand for efficient data center machines will rise. Competition with EMC/VMware and NetApp will probably intensify down the road and will make Nutanix a potential takeover candidate. Investors will win in any scenario. With a 60% gross margin, narrowing net loss, no debt, and a bright future, Nutanix IPO is attractive in the 5 to 7.5 P/S ratio range. Based on previous cases of unicorn IPOs, investors should look for the long run and be ready to average down on their investments in case of a correction after the IPO.

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