Wells Fargo: Nutanix Valuation Could Become 'Even More Compelling'

Cloud computing software company Nutanix Inc NTNX is a leader in hyper-converged infrastructure, or HCI. The stock, which was trading at stratospheric levels after its 2016 IPO, has returned to more sustainable levels despite the company's strong fundamental momentum.

The Analyst 

Wells Fargo Securities analyst Aaron Rakers initiated coverage on Nutanix with an Outperform rating and $40 price target.

The Thesis

Rakers is basing his Nutanix bull thesis on four factors, he said:

• The deepening of the company's leadership position in HCI.
• Large-deal momentum.
• The company's strategic vision and execution.
• Attractive relative valuation.

The valuation will become even more compelling as Nutanix executes on an expanding software-only delivery model, with ASC 606 revenue recognition, Rakers said. 

Wells Fargo is positive on Nutanix' addressable market opportunity. The firm IDC estimates the HCI market will grow from $2.32 billion in 2016 to $7.64 billion by 2021. "This reflects an increase from 3 percent of on-premise spend on x86 servers and external storage in 2016 to approximately 10 percent [at the end of] 2021," Rakers said. 

See also: Who's Impressed With Nutanix Following NEXT Conference?

Nutanix's top-25 customer repeat purchase multiple versus initial purchases has consistently expanded from 14.1x a year ago to 19.4x in July 2017, according to Wells Fargo. 

The firm views Nutanix' increasing software-only contributions as a positive, averaging 17 percent of total bookings for the rolling four-month quarters ending with the fourth quarter of fiscal 2017. Wells Fargo projects a revenue contribution from software in the mid-to-high 20 percent range in the third quarter of 2017 after the ASC 606 accounting standard is initiated. 

Microsoft Corporation MSFT's Azure stack and VMware, Inc. VMW's Cloud for AWS should be viewed as Nutanix' "important long-term competitors," Rakers said. 

The Price Action

Following its September 2016 IPO, Nutanix shares clocked in a gain of 131 percent. After closing at a high of $44.46 on Oct. 3, 2016, the second session following its debut, the stock was on a broader downtrend until April 2017.

Nutanix has been trending higher, although it is still trading off its highs.

At last check, shares of Nutanix were rallying 2.05 percent to $28.88.

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Photo courtesy of Nutanix.