Nutanix's (NTNX) blistering Friday debut is the latest proof the tech IPO market has come back with a vengeance following a slow start to the year. But the magnitude of Nutanix's gains might also be fresh proof that things have gotten a little overheated, given the company's income statement and competitive environment.
Nutanix, a maker of "hyperconverged" systems that combine server and storage functionality and can scale to thousands of nodes, closed on Friday up 131.3% from an IPO price of $16, which itself was above an initial $13 to $15 range. That left the company sporting a $5 billion valuation, far above the $2 billion-plus valuation it received in a 2014 funding round. It's worth even more after accounting for the 40 million-plus shares linked to issued stock options and restricted stock units (RSUs).
Nutanix's core hardware/software platform, known as Acropolis, allows clients such as Best Buy (BBY) , Toyota (TM) , AT&T (T) , NTT (NTT) , eBay (EBAY) and Deloitte to build the kinds of "scale-out" data center infrastructures one normally associates with the likes of Google, Amazon and Facebook. The latter companies have the engineering resources to build their infrastructures using internally-developed hardware and management software. But most enterprises don't, which is where Nutanix comes in.
The company pitches clients on the ability of Acropolis and complementary management software (known as Prism) to quickly deploy new server/storage resources -- there's no need for standalone servers and storage, or to create networks connecting the two -- as well as to easily scale the resources given to demanding workloads and manage everything from the proverbial "single pane of glass."
Nutanix also includes proprietary server virtualization and storage software with Acropolis. The former allows workloads to be quickly moved from one node to another, and eliminates the need for third-party virtualization software such as VMware's (VMW) widely-deployed vSphere. Thus, while Nutanix's hardware supports vSphere should a client want it, the company has become a thorn in VMware's side.
A look at Nutanix's recent growth shows the extent to which enterprises have bought into the company's sales pitch and more broadly embraced scale-out infrastructures. Sales rose 84% in the fiscal year ending July 31 to $444.9 million, and end-customers grew to 3,768 from 1,799 a year earlier. Billings rose 107% to $637.8 million, and the company recorded a healthy gross margin of 61.5%.
In spite of the growth, Nutanix is still losing money due to heavy sales and R&D investments, even if the losses aren't as bad as they might initially look. While net loss rose 33% in fiscal 2016 to $168.5 million, strong billings allowed free cash flow to improve to negative $38.7 million from negative $49 million. Companies relying heavily on software subscriptions tend to have stronger free cash flow than net income, at least while they're growing.
But even if one ignores Nutanix's losses, the company is still richly valued. After factoring options and RSUs, shares go for more than 10 times their trailing billings. Clearly Nutanix will need to keep growing at a heady pace to justify its current multiples.
And competition has begun intensifying, as incumbent server vendors take notice of Nutanix's growth and roll out their own scale-out/hyperconverged offerings. Cisco Systems (CSCO) unveiled a hyperconverged platform known as HyperFlex in March, while talking up its integration of networking functions.
Soon afterwards, Nutanix was kicked out of a Cisco partner program. Around the same time, Nutanix announced its software can run on Cisco's UCS C-Series server/storage systems, but Cisco reportedly told channel partners it doesn't support the solution.
And while its initial hyperconverged offering (a platform known as EVO:RAIL that launched in 2014) fell flat, VMware rolled out a new solution based on its popular Virtual SAN storage virtualization software in February. Server partners can use the software to provide their own hardware solutions.
The big investments Nutanix has made, and continues to make, in its storage, virtualization and management software have helped it keep rivals at bay thus far. But its core market does look much more competitive than it did a year ago. That, along with the steep multiples shares trade at following its Friday gains, provide reasons for investors to tread carefully at current levels.