Goldman Sachs Adds Nutanix To Conviction List, Says Hardware Revenue Decision Is Misunderstood

Despite a more than 5-percent decline in Nutanix Inc NTNX shares since the turn of the year, Goldman Sachs sees plenty of reason to be positive and is modeling for a more than 40-percent return.

The Analyst

Goldman Sachs' Rod Hall initiated coverage of Nutanix's stock with a Buy rating and $43 price target while adding the stock to the firm's "Conviction List."

The Thesis

Nutanix's decision to eliminate hardware revenue wasn't well received by some Wall Street analysts, but Hall said in a Tuesday note that he feels otherwise. The decision is misunderstood by many investors, the analyst said. 

Some investors think Nutanix's decision marks a major shift in its sales model, but that isn't the case from a customer point of view, Hall said. Nutanix clients will find the purchasing process "essentially unchanged," as they will continue to buy an integrated appliance, he said. 

From Nutanix's point of view, software represents 80 percent of gross profits and accounts for just 52 percent of total revenue, while hardware accounts for "exactly zero gross profit" dollars, the analyst said. While hardware will likely still represent 5 percent of sales in fiscal 2020, management is working as quickly as possible to move that number to zero, Hall said.

As the company transitions, it could see a blended gross margin rate above 80 percent, outpacing the Street's estimate of 75 percent, according to Goldman. 

Nutanix is expected to "clarify" its transition at a March 12 analyst day presentation, Hall said. 

"To some extent, we would expect market forecasts to increase to match our modeling as a result." 

Price Action

Shares of Nutanix were trading higher by 4.61 percent at the time of publication Wednesday afternoon. 

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