Nutanix has been on fire lately. In the past six months alone, the company’s stock price has rocketed 67.4%, reaching $70.30 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now still a good time to buy NTNX? Or is this a case of a company fueled by heightened investor enthusiasm? Find out in our full research report, it’s free.
Why does NTNX stock spark debate?
Originally pioneering hyperconverged infrastructure to break down traditional data center silos, Nutanix (NASDAQ: NTNX) provides a unified software platform that enables organizations to run applications and manage data across private, public, and hybrid cloud environments.
Two things to like:
1. Elite gross margin powers best-in-class business model
What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.
Nutanix’s gross margin is one of the highest in the software sector, an output of its asset-lite business model and strong pricing power. It also enables the company to fund large investments in new products and sales during periods of rapid growth to achieve higher profits in the future. As you can see below, it averaged an elite 86.9% gross margin over the last year. Said differently, roughly $86.93 was left to spend on selling, marketing, and R&D for every $100 in revenue.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Nutanix has seen gross margins improve by 2 percentage points over the last 2 years, which is solid in the software space.
2. Customer acquisition costs are recovered in record time
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
Nutanix is extremely efficient at acquiring new customers, and its CAC payback period checked in at 11.1 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Nutanix more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.
One reason to be careful:
Long-term revenue growth disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Nutanix grew its sales at a 15.4% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the software sector, which enjoys a number of secular tailwinds. Luckily, there are other things to like about Nutanix.
Final judgment
Nutanix has huge potential even though it has some open questions, and after the recent surge, the stock trades at 6.6× forward price-to-sales (or $70.30 per share). Is now a good time to buy despite the apparent froth? See for yourself in our in-depth research report, it’s free.
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