After gaining by more than 13% till 17th Jan, is yesterday's 6% dip a buying opportunity in Nutanix stock?
Shares of San Jose, California-based Nutanix Inc (NASDAQ:NTNX) fell by 6.26% on Wednesday. The fall was caused by Hewlett Packard Enterprises' (NYSE:HPE) acquisition of Nutanix's rival, SimpliVity. After being on a downward spiral towards the end of 2016, NTNX stock made a positive start to 2017, gaining more than 13% till the day before yesterday. Though NTNX stock is still down 23.86% since going public in late September 2016, it had been gaining momentum, after the recent analyst upgrades, of which Oppenheimer's was one. The average analyst price target for Nutanix stock is $33.35, and Oppenheimer came out with a $38 price target. With an implied upside of more than 18% and 38% respectively from yesterday's close price, one could be tempted to go long NTNX stock after the dip. Especially given the amount of positive commentary from various investment houses lately. So, should you buy Nutanix stock now? We'll highlight a few key facts, and let you take a call.
HPE's SimpliVity deal a threat to Nutanix?
HPE acquired SimpliVity, a hyperconverged infrastructure vendor and Nutanix's closest competitor for $650M cash, intensifying the competition in the hyperconverged infrastructure space. SimpliVity and Nutanix account for over 70% of revenue in Hyperconverged Integrated Systems (HCISs). HPE, which is already a big force in Integrated Infrastructure Systems (IISs) space will now expand its footprints in the HCIS space as well. A Seeking Alpha news report suggests that HPE 'seeks to form a broad set of enterprise data service offerings and create the industry's only "built-for-enterprise" hyperconverged solution', with this acquisition. (See Also: Why You Shouldn't Buy Twilio Inc (TWLO) Stock Yet)
This acquisition seems to have put Nutanix in a tight spot. However, RBC Capital Markets, who have an Outperform rating on Nutanix suggests that there would be a limited negative impact on the company due to the HPE-SimpliVity deal. A Barrons Blog reports Matthew Hedberg of RBC defending their stance, and he opines that:
“We think Nutanix (52% market share) was winning more than its fair share of business against both HPE (3% market share) and SimpliVity (18% market share) independently, and bringing the two companies together likely does little to change Nutanix’s win rates.”
On the other hand, Shebly Seyrafi of FBN Securities has a different view and thinks "the combination of HPE’s go-to-market (GTM) capability along with SimpliVity’s technology should create a more competitive entity for NTNX." A Gartner report also states that SimpliVity has "a strong mid-market presence and growing acceptance in large enterprises." Shebly Seyrafi also points out that even with just "~750 employees worldwide (about a third of NTNX’s 2,354 employees as of the Oct. 2016 quarter)" SimpliVity has shipped "more than 6K systems" since 2013, which he thinks is impressive. He expects this deal would expedite market penetration for HPE and help it close in on Nutanix.
There are divided opinions about this deal but one thing is for sure that the acquisition is fortifying the competition in the HCIS market, which according to Gartner is expected to grow at a 60.5% CAGR through 2020 to $6.0 billion. The actual impact on Nutanix can only be assessed once the full details of the deal are out.
Investors should also wait for the latest short interest numbers for NTNX stock to come out before making a move. As per the latest available data, Nutanix saw a short interest jump of almost 10% between December 15th and December 30th, with short interest increasing by more than 4.9M shares. As of December-end, short interest formed a sizeable 32.2 percent of the total float. So, the direction shorts are headed in would give us a better sense of the situation. (See Also: Amazon.com, Inc.: This Could Be The Biggest Reason To Buy AMZN Stock )
The hiring of GoPro's vice president of information technology Wendy Pfeiffer as its CIO is seen as a positive move, as Nutanix is seeking strong growth.
A Forbes article claims that "the emergence of containers as the third wave of computing will also impact hyperconverged infrastructure appliances". The article talks about how the dynamics of the cloud markets in general, are changing, and to deliver software-defined networking and storage, containers may take the place of the preferred compute layer in HCIS. Diamanti is an early mover in container-based hyperconverged infrastructure. The author is also of the view that in the future, VMware and Microsoft, who Nutanix claims are its main competitors would "integrate their infrastructure management tools and private cloud offerings with containers". It is still not known how Nutanix would move into this space and how successful would it be, with some players already getting a head start in this space.
Summing It Up
Nutanix stock has been highly volatile, but it started the year well, gaining more than 13% before yesterday's fall. There is a renewed optimism about NTNX stock after a string of analyst upgrades and positive coverage. However, the stock is still down by about 40% from its all-time peak of ~$46.8 a share. No doubt, Nutanix is a company with great potential, but with the HPE-SimpliVity deal, Nutanix could find it increasingly difficult to maintain a pricing premium over its competitors. With HPE's backing, SimpliVity would become a more trustworthy proposition than Nutanix. And this could become an important advantage, given that "many enterprises are reluctant to commit their mission-critical workloads to vendors that have not reached profitability", as Gartner points out. With so much uncertainty, it would be prudent for an investor to stay way from NTNX stock for the time being. One needs to closely follow all of the events mentioned above as they unfold before making a move.
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