Morgan Stanley Lifts Nutanix Price Target By 60% Following 'Strong' Q1

Nutanix Inc NTNX reported fiscal first quarter results that exceeded estimates after the close Thursday. Billings rose a solid 32 percent year-over-year to $315.3 million and deferred revenue climbed 48 percent to $408.8 million.

The company issued upbeat bottom-line guidance, while its revenue guidance was in line.

The stellar quarterly results left Morgan Stanley impressed, prompting it to bump its price target for the shares by a whopping 60 percent.

The Analyst

Morgan Stanley analyst Katy Huberty maintained her Equal-weight rating on shares of Nutanix and lifted the price target for the shares from $22 to $35, citing the strong results and guidance, along with Nutanix's software transition story and multiple expansion at peers.

The Thesis

Federal strength, particularly in the "better-funded" U.S. agencies like defense, helped drive the 3 percent revenue upside in the quarter, Huberty said in a Monday note. (See Huberty's track record here.) 

Increasing software-only distribution led to a 130-basis-point gross margin beat, Huberty said. Nutanix's transition is occuring faster than expected, she said. 

As the company's software-only mix continues to increase, Huberty said she expects margin upside will flow through to the January quarter. Nutanix plans to reduce exposure to pass-through hardware by two-thirds, helping to achieve gross margins north of 70 percent, according to Morgan Stanley.

New customer growth slowed from 34 percent year-over-year in the fourth quarter of 2017 to 8 percent, Huberty said. Difficult comparisons and a strategy shift to focus on large customers and deal sizes were blamed for the slowdown. A growth re-acceleration in this metric is key to support the long-term trajectory, Huberty said. 

Morgan Stanley updated its base and bull case valuations to reflect the average and high end of where software peers trade at similar growth rates.

The Price Action

At the time of writing, shares of Nutanix were rallying 14.90 percent to $37.69. The stock is up about 32 percent year-to-date.

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