This cloud-based title turns out to be a top-notch growth game
Nutanix (NASDAQ: NTNX) appeared to be poised to explode in late 2020 thanks to the tech company’s transition to a subscription-based business model and growing demand for hyperconverged cloud infrastructure (HCI). Unsurprisingly, Nutanix stock has beaten the overall market so far this year with strong quarterly results.
Nutanix stock prices hit a two-year high in late June after management painted a bright picture of its outlook on recent Investor Day. Wall Street has also become bullish on Nutanix stocks, as at least seven investment company analysts raised their price targets. All of this indicates that Nutanix is ââone of the best cloud stocks to buy right now, and investors should consider going long if they haven’t already. Let’s see why.
Nutanix benefits from a great opportunity
Nutanix operates in the rapidly growing HCI market which is gaining popularity due to its scalability, ease of deployment and low costs. According to a third-party estimate, the global HCI market revenue could grow from $ 7.8 billion at the end of 2020 to more than $ 27 billion by 2025, registering a compound annual growth rate of 28% throughout the forecast period.
Unsurprisingly, Nutanix is ââexperiencing strong growth in the value of its contract. The company ended the third quarter with an 18% year-over-year increase in the annual contract value (ACV) of its billings to $ 159.9 million, which passed the high end of its forecast range of $ 150 million to $ 155 million. Nutanix calculates LCA by dividing the total contract value by the contract length.
LCA at run rate, which is the sum of the LCA of all contracts that were in effect at the end of the quarter, increased 25% year-over-year to $ 1.45 billion. It’s worth noting that these metrics grew at a much faster pace than the company’s overall revenue, which grew 8% year-over-year in the third quarter to $ 344.5 million.
Nutanix’s tremendous growth in LCA is the result of a sharp increase in customer base and spending. The company ended the third quarter with 19,430 customers, a 17% year-over-year jump. Best of all, the number of customers with Lifetime Reservations (LTBs) over $ 1 million increased nearly 28% year over year to 1,433. Nutanix had 81 customers with LTBs of over $ 1 million. over $ 10 million, up 27% from the previous year. The number of customers with an LTB between $ 5 million and $ 10 million stood at 144, up 36% year-over-year.
Higher spending from Nutanix customers and an average contract length of 3.3 years should ensure robust growth in revenue and bottom line for the business over the long term. This is clear from the fact that Nutanix’s gross margin has grown at an impressive rate since the company’s transition to a subscription-based business model in late 2017.
Subscriptions represented 89% of the company’s total revenue in the last quarter, up from 82% the year before. Nutanix subscription revenue grew nearly 18% year-over-year, while revenue from legacy sources such as non-portable hardware and software declined significantly. Improved subscription business revenue helped Nutanix increase its non-GAAP gross margin by 100 basis points to 81.7% in the quarter, meaning there is still room for growth.
All ready to walk on gas
Nutanix anticipates double-digit percentage revenue growth this quarter based on a low to average 20% increase in LCA over the prior year period. Additionally, the company expects ACV billing for the full year to be between $ 590 million and $ 595 million, up about 18% from fiscal 2020.
Analysts expect these improvements to reflect positively on revenue and earnings for Nutanix next year. Its revenue is expected to jump nearly 14% in the next fiscal year, up sharply from expected growth of just 4.5% this year. Meanwhile, the company expects an annual ACV billing growth rate of 25% through fiscal 2025, which is not surprising as it expects its total market opportunity to grow from $ 39 billion. last year to $ 61 billion by 2025.
The bottom line is also expected to continue to improve over the long term as Nutanix cuts spending. The company aims to reduce sales and marketing costs from 79% of revenue in the last fiscal year to a range of 43% to 47% of revenue by 2025, through higher renewals and improved business efficiency which should reduce customer acquisition costs. As a result, Nutanix expects operating income of $ 150 million to $ 350 million by fiscal 2025, compared to an estimated operating loss of $ 315 million this year.
So, it can be safely concluded that Nutanix is ââjust getting started and looks ready for more potential, making it a growth stock to buy right now.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.