As the Nasdaq continues trading over 6,000, it has become hard to find Internet, chip and cloud software firms that:
- Are posting double-digit sales growth
- Aren't facing any major long-term competitive and/or secular headwinds.
- Trade at moderate sales and/or earnings multiples.
It is a little easier, however, to find value plays among enterprise hardware firms, as well as among enterprise software providers that get a majority of their revenue from traditional software licenses and related maintenance/support contracts rather than cloud apps. Here are three companies that fit the bill.
Splunk
Splunk Inc. (SPLK) sold off in late May after reporting disappointing April quarter license revenue growth, and making a smaller-than-expected full-year billings guidance hike. With the stock having added to its losses since, Splunk is now down nearly 40% from its early-2014 highs, and trades for a reasonable multiple of 4.8 times its consensus fiscal 2018 (ends in January 2018) billings estimate after backing out net cash from the company's market cap.
Splunk, the biggest provider of software for analyzing machine and log data from IT systems and apps, does face some meaningful competitive threats. In particular, the open-source ELK software stack provided by startup Elastic and others -- it consists of the Elasticsearch log data search tool, as well as software for processing and visualizing log data -- has been gaining followers. Elastic's clients include companies such as Facebook ( FB) , Netflix ( NFLX) , Sprint ( S) and Walmart ( WMT) .But Splunk's feature set and flexibility still make it very popular among enterprises that prefer to avoid the challenges involved in piecing together an open-source alternative, as does the large ecosystem of third-party apps and add-ons supporting its software. The company is closing in on 14,000 customers after adding close to 500 last quarter. And though the lion's share of its revenue comes from on-premise software deployments -- many customers prefer to implement Splunk's software close to where the data it analyzes is created -- Splunk's cloud revenue more than doubled annually last quarter to $17.8 million.
Splunk's near-term challenges may go beyond the European sales execution issues brought up on its last earnings call. But this is still a company expected to see its billings grow 27% this fiscal year, as corporate interest in analytics tools that can derive operational and security insights from machine data remains strong. Overall, Splunk still seems to be on sound footing.
Nutanix
It's easy to be skeptical about an enterprise hardware firm that's losing money and competing head-on with HP Enterprise Co. (HPE) and Cisco Systems Inc. (CSCO) . But Nutanix Inc.'s (NTNX) technology, high-profile partnerships and market positioning arguably make it a unique case.
With the help of OEM/reseller deals with Dell ( DVMT) and Lenovo ( LNVGY) , Nutanix is a top enterprise provider of hyperconverged systems -- they integrate server, storage and networking functions, come bundled with virtualization and management software, and can scale to hundreds or thousands of nodes that can be jointly managed. While the likes of Alphabet/Google ( GOOGL) and Facebook have the engineering resources to create their own hyperconverged systems, enterprises are more likely to turn to Nutanix and its peers.Nutanix ended its April quarter with 6,172 customers, a sequential increase of 792. Notable clients include Deloitte, Toyota (TM) , AT&T (T) , Staples (SPLS) and Volkswagen. The rich storage software feature set of its Acropolis hardware/virtualization platform is a selling point, as are the tools provided for managing Acropolis installations and automating the deployment of apps running on Acropolis systems.
Shares were crushed in early March after Nutanix issued disappointing guidance that stoked fears of intensifying competition from HPE (recently bought Nutanix rival SimpliVity) and Cisco, as well as from a VMware (VMW) hyperconverged software platform that's offered by hardware partners. But they rebounded a bit after Nutanix beat estimates and issued solid billings guidance in late May.
Nutanix is still forecast to deliver 33% billings growth in fiscal 2018 (ends in June 2018), and trades for less than 2 times its billings consensus estimate for the year ($1.29 billion) after accounting for net cash. And though it's very tough to project something like this, on average analysts expect the company's free cash flow (FCF) will improve from negative $41 million in fiscal 2017 to negative $15 million in fiscal 2018, and to $78 million in fiscal 2019.
A new alliance with IBM (IBM) to make Nutanix's software platform available on IBM Power server could provide a lift going forward. As could a new partnership with Google to help companies deploy hybrid clouds pairing Google's cloud infrastructure with on-premise Nutanix deployments.
There's also ongoing speculation that Nutanix, which only has a $2.5 billion enterprise value, could be acquired by Cisco, IBM or another enterprise IT firm. But even if that doesn't materialize, Nutanix has some important things going for it.
Super Micro
As its no-frills web site shows, Super Micro Computer Ltd. (SMCI) is far from the flashiest enterprise tech name out there. But over the years, the company has shown a knack for creating well-engineered modular servers and storage systems that get high marks for their computing densities and power efficiency. And as more enterprises and service providers embrace such hardware relative to expensive "big iron" servers and high-end storage arrays, business has been pretty good.
Though IDC estimates global server and storage revenue respectively 4.6% and 0.5% annually in Q1, Super Micro's March quarter revenue rose 18.5% to $631.1 million. Strong demand for the company's high-density X10 Twin family servers helped, as did growing flash storage sales. In addition, though they're only a combined 16% of revenue for now, server sales for IoT and embedded deployments grew 38%, and sales of "accelerated computing solutions" for AI and high-performance computing (HPC) projects grew 176%.Shares remain down nearly 40% from their early-2015 highs, thanks partly due to a big decline in orders from a major cloud client that seems to be relying heavily on its own server designs ( HPE can sympathize). But demand has been pretty solid elsewhere. And in the coming months, Intel Corp.'s (INTC) anticipated launch of Xeon server CPUs based on its Skylake architecture should provide a boost. Super Micro unveiled a new server line ( the X11) supporting the CPUs in May.
Super Micro trades for only 12 times a fiscal 2018 (ends in June 2018) EPS consensus of $2.07, even though analysts on average expect 11% sales growth and 27% EPS growth during the year. This feels like a company that has been unfairly grouped with various enterprise IT laggards, even though its growth profile and strategic positioning looks very different.
