- Nutanix shares have risen sharply ahead of quiet period expiry on 9th November.
- Reportedly, Nutanix is scheduled to make a secondary offering early next year, a risk investors shouldn't ignore.
- Should you buy NTNX stock now? We'll lay out the risks and let you decide for yourself.
Shares of San Jose, California-based Nutanix Inc (NASDAQ:NTNX) continued to fall even on a day like yesterday, when markets moved higher globally following the FBI's acquittal of Hillary Clinton. NTNX stock fell by over 3.1% on Monday, and the stock was down ~50% from its peak. Surprisingly, until yesterday, even a consensus price target of ~$33 a share didn't do much to shore up investor confidence. Why? Reportedly, Nutanix is scheduled to make a secondary offering in March next year, much like the one that hammered Twilio (NYSE:TWLO) shares last month, only, way bigger. If that's true, NTNX stock will likely fall further. Investors would do well to avoid the stock until there's official word on the matter.
The Risk Could Be Massive
Twilio's announcement of a secondary offering and the subsequent crash in its stock price are yet to fade from memory. So, that's a good starting point to understand what could happen to NTNX stock if the company does make a secondary offering next year. At the beginning of October this year, Twilio announced that it would sell 7 million shares through a secondary offering. More importantly, most (6.4 million) of the shares were sold by existing shareholders or investors, implying Twilio wouldn't really benefit much from the offering in monetary terms. What's more, the list of selling shareholders included the company's CEO, Jeff Lawson (among others top execs), who reportedly sold 831,000 shares, ~13% of what was being sold by existing shareholders.
The result? Twilio's secondary offering was made at $40 a share. Twlio shares last traded at ~$30, down from their peak at ~$71. Twilio's case is probably the most referenced in recent posts about Nutanix, and while that is a good basic starting point to understand what might be coming, there are a few key differences. For starters, we don't know for sure if Nutanix's secondary offering will consist largely of exits for existing shareholders. Further, we don't know if key executives will sell, which is likely to have primarily caused the panic in Twilio's case. But, what we do know is that Nutanix's secondary offering could potentially be way more massive in terms of scale, according to a report on TheStreet.com:
"But what's not to love about Nutanix is how the company came public, with a sliver deal of just 14.8 million shares, purposely designed to inflate demand at the IPO while another 122 million shares wait in reserve. Shortly after the company's lock-up period expires on March 29, Cramer said, Nutanix will offer more shares in a secondary offering, one that will clobber existing shareholders."
To put things into perspective, Twilio eventually offered ~8 million shares in its secondary offering, of which, only ~1.7 million shares were sold by Twilio. So, the resulting equity dilution was limited to the extent of those ~1.7 million shares. That, on a base of Twilio's diluted share count of ~83.9 million shares, seems relatively innocuous when compared to the numbers TheStreet.com has pulled out for Nutanix. Like we said earlier, the sentiment may turn out to be completely different. Yet, it's hard to see the silver lining. Either existing shareholders will make exits, or fresh shares will be issued. Either way, it's likely to hurt investors, either by flooding the market with sellers (assuming exits), or by flooding the markets and diluting equity (in case of new shares). While one option seems better than the other, neither seems ideal for somebody who owns NTNX stock.
Summing It Up
Nutanix is scheduled to report its first set of quarterly results as a public company on 29th November. While the company's Q1 numbers are obviously important, investors' attention may be focused on the possibility of a secondary offering next year. Short interest has risen from 'NIL' at the end of September, to a little over 1.7 million shares as of 14th October. Given the average trading volumes (~5 million shares) for Nutanix, that's probably not a big deal, but it doesn't help the sentiment. Especially at a time when reports of growing competition are emerging. Analysts have a consensus price target of ~$33 a share for NTNX stock, which some might find mildly comforting. However, Nutanix shares have seen their value cut in half from their peak of ~$46.8 a share. Investors would do well to avoid the stock until there's official word on the matter. Evaluating technology stocks? Check out Amigobulls' top tech stock picks, which have beaten the NASDAQ by over 115%.