How To Play Nutanix Inc (NTNX) Stock After Yesterday's Pop

  • Nutanix stock gained a staggering 15% on Tuesday, to end the day at $32.5 a share.
  • The stock has now surpassed analysts' consensus price target.
  • Should you buy into Nutanix stock after yesterday's massive pop?

Shares of San Jose, California-based Nutanix Inc (NASDAQ:NTNX) surged by a staggering 15% yesterday, taking the stock to about $32.5 a share. The stock, which was trading well below the consensus price target of $32.25, has now gone past that number. Yet, the strong rally might encourage some investors to consider buying the stock. More so, because NTNX has received a lot of positive coverage lately, and the stock is still trading at a price that's ~31% lower than it was a month ago. So, should you buy Nutanix stock? We'll take you through some of the key factors that could influence this decision and let you decide.

What's The Optimism About?

Nutanix is due to report its first set of results as a public company, later this month, on 29th November. And among the many names that have put their weight behind Nutanix, is that of Credit Suisse’s Kulbinder Garcha, who believes that the company should "easily beat" revenue estimates. Garcha, who has an "outperform" rating assigned to the stock, has a price target of $38 a share, implying a 17% potential upside, even after yesterday's massive rally. He expects Nutanix to deliver a revenue of $165 million, and a loss of 44 cents a share, well above the Street's revenue estimate of $151.4 million, and only slightly worse than the estimated loss of 43 cents a share. (Also Read: The List Of Must Watch Upcoming Tech IPOs)

Understandably, newly listed tech companies aren't judged as much based on bottom line numbers, as they are on sales growth. And Garcha's optimistic view could have contributed to yesterday's pop. But that's not the only positive news pertaining to Nutanix. A report published by Barron's a little over a week ago, expects Nutanix to grab greater market share in the coming months. Quoting from the report, which is based on Barclays' survey on the state of the storage equipment industry:

"According to our 3Q survey, Nutanix and Simplivity were among the top vendors that respondents expect to grab increasing wallet share in the next 12 months. We think this could be an indication of the broader industry’s shift towards converged and hyper-converged offerings"

Last but not the least, Nutanix shares have been extremely volatile since the company's IPO at the end of September this year. After posting a 192% post IPO gain, Nutanix shares saw their value cut in half last month, falling all the way down to $23.1 a share. Prior to yesterday's rally, Nutanix shares were trading way below the consensus price target of $32.25 a share, at $28.2 a piece, still down nearly 40% from their peak of ~$47. So, a rally was probably on the cards anyway. But before you look at all these numbers and decide to buy the stock, here are some of the risks that come with owning Nutanix stock.

The Risks Of Buying Nutanix Stock Right Now

Competition - If you noticed, in that brief snippet we quoted from Barron's, there's another name, Simplivity. Simplivity, which reportedly occupies the second spot in the hyperconverged infrastructure space behind Nutanix, is catching up. Reports suggest that Simplivity is growing at a much faster pace, while also paving the way for profitability with its high margin strategy. In the context of the same survey we quoted earlier, the report by Barron's also mentions that:

"EMC, VMware and Nimble also received a high number of responses. We note that HP Enterprise and NetApp moved to 3 and 2 mentions respectively, after receiving 0 mentions in the 2Q survey."

Some of these are deep-pocketed competitors and given the massive growth projected for this industry, it won't be long before the big players come swarming in. Take for instance Hewlett Packard Enterprises (NYSE:HPE), which now claims to have an offering that has " more capability, scalability and availability at a 25 to 30 percent lower cost than market leader Nutanix". Even if you put aside all of this, reports suggest that Nutanix could be eyeing a secondary stock offering in March next year. And if these reports turn out to be accurate, the massive scale of this offering could dent shareholders significantly. Quoting from a post on TheStreet:

"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." (Also Read: How Big A Risk Is Nutanix's Secondary Offering)

Summing It Up

Nutanix looks poised to deliver a good first quarter post its IPO. Nutanix stock has received a lot of positive coverage lately, and given that the stock had corrected by over 50% from its peak a month ago, yesterday's rally isn't surprising. While the stock is still down by about 31% from last month's peak of $47 a share, investors would do well to stay out of the stock for now, at least till more details are made available about the company's plan to reportedly make a secondary offering early next year. Nutanix does come across as a company with great potential, but for now, given the risks, the stock may be best avoided. Looking for tech stocks that have beaten the NASDAQ by more than 100%? Check out these top tech stock picks.

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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