- The long-awaited IPO of Nutanix will take place this Friday.
- Impressive growth rates, margins, and market share make Nutanix a major player in the IT market.
- The Nutanix IPO offers an attractive opportunity for investors.
Nine months after it filed for IPO and three months after the previous high-profile unicorn IPO of Twilio, Nutanix will go public this Friday in a highly anticipated event. The data center software vendor repeatedly delayed its IPO since the beginning of the year amid the global macroeconomic turbulence that drove sharp fluctuations in the market and had a significant impact on tech stocks. As we have witnessed many times before, having a great technology and excellent financials are not enough for a successful IPO, as the market sentiment plays an important role. As markets grew relatively calm after the Fed decided not to raise rates in September, a few companies are using that opportunity to go public. After all, a possible bull market is ahead of us with the U.S. elections and the December rate decision.
Unlike many other unicorns, Nutanix does not offer any exciting or disruptive technologies that many people can relate to or that participate in high-profile segments like instant messaging, e-payments, ride-hailing, etc. Nutanix simply offers a data center solution that allows enterprises to save on data center machines, reduce IT spending, and save space and power. Nutanix provides software solutions that combine traditional silos of server, virtualization, and storage into one integrated solution and, according to an IDC report, Nutanix solutions allow enterprises to cut costs by up to 60%.
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This strategy proved very successful for Nutanix, which increased its top-line rapidly, with 90% YoY growth and 20% QoQ growth, as shown in the chart below. The really impressive thing in Nutanix's growth is that the company succeeded in growing while keeping a steady gross margin and narrowing their losses. This shows investors that Nutanix is determined to produce sustainable growth while not neglecting the struggle for profitability. In these days of a fragile and fluctuating market, this is crucial.
Nutanix greatly benefits from the significant rise in demand for cloud service, data center infrastructure, and services, that are driven by the increase in demand for cloud-based applications and services. As the request for cloud services increases, so does the need for servers, storage machines, and other infrastructure tools, which creates a significant financial and operating burden on enterprise software companies. This problem is expected to intensify as the demand for cloud-based and online services rises. There are many technologies aimed to help companies in this industry improve efficiency, optimize processes, and reduce costs. Hyperconverged infrastructure is one of Nutanix's main offerings in this area, and this segment is expected to grow from $982M this year up to $4.8B in 2019.
As the growth potential of this segment is substantial, it has attracted the largest IT vendors like Vmware (NYSE:VMW), DELL TECHNOLOGS (NYSE:DVMT), Hewlett Packard Enterprises (NYSE:HPE), NetApp (NSDQ:NTAP), Cisco (NSDQ:CSCO), and more. Even though the market's hyperconverged infrastructure is highly competitive, and Nutanix competes with tech giants that have very deep pockets, the company has not only succeeded in growing substantially, as presented in the chart above, but also leads the market by sales according to IDC.
Nutanix joins the public markets after raising almost $400M in equity and debt in the private market between 2009 and 2016. In its most recent series E equity funding round, Nutanix was valued at $2B when the company’s stock was valued at $13.4 per share in August 2014. Since then, Nutanix has completed a few rounds of debt financing in relatively small amounts that should be mostly repaid from the proceeds of the IPO under the terms of the notes.
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In an earlier article, I estimated that Nutanix would not offer a higher share price than the series E price and would even offer some discounts as early investors’ upsides are protected. I also offered a potential P/S ratio range between 5 and 7.5 as an investable valuation. Eight months after that piece was first published, Nutanix priced its IPO at the range of $11 and $13, which presents a 10% discount on the company’s series E share price and an attractive P/S ratio of 3.8. As we witnessed in previous instances, unicorn IPOs that start with a discounted share price tend to open the trade with significantly higher share prices and offer a significant upside, even for individual retail investors. Moreover, the market is hungry for IPOs of successful and prominent tech unicorns, as we witnessed from Twilio, which is currently trading at 4x its IPO price in just three months ago.
With the markets desire for tech unicorn IPOs and given the impressive growth rates and margins, significant market positioning with an amazing growth potential, and, of course, attractive valuation, investors should consider buying into the Nutanix IPO.
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