NTNX stock has lost more than 26% since its Q2 earnings release on March 2nd. Should you buy Nutanix Inc stock near its all-time low?
Shares of San Jose, California-based hyperconverged infrastructure provider Nutanix Inc (NASDAQ:NTNX) got crushed on March 3rd. NTNX stock lost more than 26% after the company reported its Q2 2017 earnings, after the bell on March 2nd. Eventually, NTNX stock closed at $23, down from its pre-earnings close price of $31.12, wiping out all the YTD gains. Nutanix reported a beat on both top line and bottom line numbers for the latest quarter. This is the company's second earnings release since its explosive IPO in September 2016. Investors seem to have been spooked by weak Q3 outlook. Was the punishment by investors warranted for NTNX stock? What next? How should you play NTNX stock now? Let's take a closer look.
Q2 2017 Earnings Beat Expectations.
Nutanix reported a lower than expected loss, with the non-GAAP EPS coming in at -$0.28, beating the average analyst estimate by $0.07. On the revenue front, the company reported $182.2M in revenues, beating analysts' consensus of $178.3M, up by 77% YoY and 9% QoQ. Billings increased 59% YoY to $227.4M, but were down 5% QoQ. This quarter saw a massive 342% YoY increase in cash flow from operations, which increased to $19.8M, representing a 375% QoQ gain. The free cash flow turned positive, coming in at $7.1M for the quarter, an increase of 219% YoY and 191% QoQ. The cloud infrastructure platform provider continued its trend of increasing deferred revenues in the latest quarter as well. The company registered $421M in deferred revenue, a 128% YoY increase. Overall, Nutanix had a very good second quarter. To quote CEO Dheeraj Pandey on the Q2 earnings: "Our journey has taken us from an unknown upstart to a well-established enterprise IT brand approaching a $1 billion annualized billings run-rate in just five years of selling."
Why Nutanix Stock Was Punished?
Investors seem to be taken aback by Nutanix's weak Q3 outlook and some of the risks the company is set to face going ahead. The cloud infrastructure platform provider's Q3 2017 guidance states that revenues would be in the range of $180M-$190M and the Non-GAAP loss per share could be in the $0.45-$0.48 range, calculated on weighted average shares outstanding of approximately 44 million. The Q3 guidance was seen as a big red flag by investors. The reason being, the bottom-line forecast is well below analysts' expectations of $0.35 loss-per-share, and the company needs to hit the high end of guidance to meet or beat the consensus of $188.5 million revenue. In the earnings call, the management stated that Q3 is expected to be a seasonally slow quarter for them, and that the decline in North American sales productivity is an issue for Q3 2017. These factors make it even more difficult for the company to beat expectations. Rising DRAM prices, which are expected to go up by 30%-40% in Q3 will also be a risk on the company's margins.
The decline in revenue from Nutanix's biggest revenue region, the North Americas and increasing costs with underperforming sales teams could weigh heavy on the hyperconverged infrastructure provider. A Seeking Alpha post describes the management's lame explanation for the sales team's underperformance and its lack of initiative as "highly nonprofessional and almost irresponsible approach". The author goes on to state that one could expect "these issues to only get more tenuous going forward when not being addressed adequately or even not at all." To add to these, the lock-up expiration of ~84M shares on March 28th is another issue making the investors apprehensive about the stock. The $3.24 million second-quarter stock-based compensation that was excluded from the adjusted net loss total also seems to have put investors on alert. If included, the net loss per share should have been $0.66 per share and an expectation that the stock-based compensation is only going to go higher in the third quarter has not helped Nutanix's cause.
Analyst Seem To Have Mixed Reactions to Nutanix Stock.
NTNX stock has seen a number of rating changes and price-target corrections after the earnings. Morgan Stanley, FBN Securities and J P Morgan are the few investment houses which have gone for price target reductions. Some of them have even downgraded their rating on NTNX stock as a Barron post reports. Morgan Stanley’s Katy Huberty was one analyst who came down hard on NTNX stock, cutting her rating from Equal Weight to Underweight and slashed her target to $20 from $29. She cited rising competition from Hewlett Packard Enterprises (NYSE:HPE) and Cisco (NASDAQ:CSCO) among her chief concerns. Needham and Company, Credit Suisse are some investment houses who reiterated their Outperform rating on NTNX stock. Kulbinder Garcha of Credit Suisse who has a $38 price target defends Nutanix stating that "what ails the company are “short term issues,” and that the company’s software-centric approach still is a big advantage."
Nutanix stock, which is trading near its all-time low is a high-risk proposition. The market may have overreacted to Nutanix's Q3 outlook, but one thing is for sure, NTNX stock could be very volatile going ahead. Nutanix still has strong revenue growth and increased adoption of its offerings, like in the case of its Acropolis Hypervisor, which is a welcome sign. But the company faces stiff competition from deep-pocketed competitors like Cisco and Hewlett Packard Enterprises. It also has too many risks going into the third quarter as discussed above. Nutanix is in for a tough quarter and it would be prudent for investors to stay away from Nutanix stock, at least till the lock-up period for the of ~84M shares expires on March 28th, and things become clearer with regard to Nutanix's business risks. At these levels, Nutanix could be a high risk-reward bet for risk-taking investors, but we expect NTNX stock to be under a lot of pressure going ahead.
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