Nutanix Still Not Viewed As A Leader In Hybrid Cloud Services, But That Could Change

Following its AlphaWise CIO survey, Morgan Stanley said CIOs don't yet view Nutanix Inc NTNX as a hybrid cloud leader. However, the firm feels the view could change with the upcoming transition to software-only model. The firm has an Equal-weight rating on Nutanix with a $22 price target.

HCI Market To Grow But At Slower Pace

Analyst Katy Huberty indicated that the survey highlighted the growing penetration of hyperconverged infrastructure, or HCI, with Nutanix extending its lead in the segment. The survey revealed that the penetration of HCI increased from 20 percent of respondents in Jan. 2017 to 37 percent in Oct. 2017.

The analyst sees continued growth, given that HCI penetration is only 37 percent of companies relative to all-flash array penetration of roughly 80 percent. That said, the analyst noted that fewer CIOs plan to increase HCI spending over the next year, signaling slowing market growth.

With Nutanix typically starting by selling into one application and then penetrating into additional applications over time, Morgan Stanley thinks it can grow spending faster than customer acquisition growth long-term, particularly, as it focuses on Global 2000 customers.

See Also: Nutanix Is Still In 'Hyper Growth Mode,' What To Expect Over The Coming Quarters

Leader In HCI Market

Huberty noted that Nutanix has extended its market share lead over legacy vendors such as Cisco Systems, Inc. CSCO, EMC and Hewlett Packard Enterprise Co HPE. Moreover, the firm thinks Nutanix can maintain its lead, as competitors get "distracted by recent acquisitions" such as Dell/EMC, Hewlett-Packard Enterprise/SimpliVity and Cisco/Springpath.

More Work to Do In Hybrid Cloud Market

Despite being the market leader in HCI, Morgan Stanley believes Nutanix "has more work to do to position it as a hybrid/enterprise cloud OS." Giving an anecdote, the firm noted that no respondents in the survey chose Nutanix as central to their hybrid cloud strategy, while Microsoft Corporation MSFT, Amazon.com, Inc. AMZN's AWS and VMware, Inc. VMW were ranked most central to CIO's hybrid cloud strategy.

That said, the firm expressed optimism on Nutanix' new products Calm Application Automation and Xi Cloud Services, which allow for mobility of applications and a seamless experience across public and private clouds.

Software Strategy – Key to Bull Case

Huberty believes software strategy execution could drive its $35 bull case. However, she sees risk to the bull case, as the increased focus on software-only sales could negatively impact demand or shift discounting to the software portion of the solution.

"Given roughly 70% of product sales are delivered via appliances today, we see a multiple in line with the average of data center appliance peers more warranted (~2.8x), driving our $22 PT and keeping us at our Equal-weight rating, albeit with anticipation of a possible move toward our bull case."