Hybrid Cloud And AI Tailwinds Will Drive Powerful Long Term Upside Potential

Catalysts

About Nutanix

Nutanix provides a cloud software platform that helps enterprises run and manage applications across private data centers and public clouds.

What are the underlying business or industry changes driving this perspective?

• Growing interest in hybrid and multi cloud architectures, including customers looking to modernize away from traditional 3 tier virtualization, positions Nutanix Cloud Platform, NC2 and Nutanix Kubernetes Platform as central infrastructure choices. This can support long term subscription revenue and ARR growth.
• Broadcom related VMware migrations are creating a multi year wave of new workloads moving to alternative platforms. Nutanix is already seeing larger land and expand deals and new logo wins from GLOBAL 2000, government and federal customers, which can support bookings, ARR and future revenue visibility.
• Rising customer focus on AI and modern applications, including interest in GenAI projects, is pulling through a wider Nutanix stack, such as Nutanix Enterprise AI, Kubernetes Platform, Unified Storage and database services. This can widen the spend per customer and support earnings and net margin over time through software mix.
• Expansion of OEM partnerships with large server and storage vendors such as Cisco, Dell and Lenovo, along with support for external arrays like PowerFlex, PowerStore and Pure Storage FlashArray, increases Nutanix’s distribution reach and hardware attach opportunities. This can help sustain revenue and free cash flow while keeping operating margins disciplined.
• High margin software economics, shown by an 88% non GAAP gross margin and a 26% free cash flow margin in Q1, combined with a subscription model where revenue may shift but expected lifetime recognition on FY26 bookings is unchanged, can support net income and earnings growth as more of the existing ARR base converts into recognized revenue.

Assumptions

This narrative explores a more optimistic perspective on Nutanix compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Nutanix's revenue will grow by 17.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 8.4% today to 15.5% in 3 years time.
• The bullish analysts expect earnings to reach $657.7 million (and earnings per share of $2.12) by about January 2029, up from $220.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 50.1x on those 2029 earnings, down from 62.0x today. This future PE is greater than the current PE for the US Software industry at 31.7x.
• The bullish analysts expect the number of shares outstanding to grow by 1.4% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The growing use of future license start dates and greater reliance on OEM partners means more of Nutanix's business is being recognized later. If this pattern persists or intensifies, reported revenue growth could look weaker than bookings for an extended period, which can weigh on how investors view the company’s revenue trajectory and earnings profile.
• OEM hardware supply constraints and longer lead times, which management is already hearing about anecdotally, could delay when partners ship appliances. As a result, Nutanix may recognize its software revenue later than expected, creating ongoing pressure on near term revenue and potentially limiting operating leverage and net margins.
• Broadcom related VMware migrations are complex, often multiyear projects, and Nutanix is already having to offer customers more flexibility on when licenses start. If migrations take longer than expected or customers slow roll deployments, that can delay expansion, temper ARR conversion into revenue and cap earnings growth from these opportunities.
• US federal business is subject to higher than historical variability due to personnel and policy changes and events such as government shutdowns. If volatility increases or budgets become more constrained, this could limit growth from a segment that sees seasonal Q1 strength and reduce the contribution to revenue, operating margin and free cash flow.
• Hybrid environments where most existing workloads stay on virtual machines while new ones move to containers create room for multiple platforms, and Nutanix still faces competition from other vendors such as Red Hat and public clouds. If it captures a smaller share of VMware migrations or customers stick with incumbent or alternative tools, that could hold back ARR, revenue scale and long term net margin improvement.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Nutanix is $90.95, which represents up to two standard deviations above the consensus price target of $70.7. This valuation is based on what can be assumed as the expectations of Nutanix's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $95.0, and the most bearish reporting a price target of just $53.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $4.3 billion, earnings will come to $657.7 million, and it would be trading on a PE ratio of 50.1x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $50.6, the analyst price target of $90.95 is 44.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.