Hybrid Multicloud And VMware Migrations Will Face Headwinds Yet Ultimately Strengthen Long-Term Position

Catalysts

About Nutanix

Nutanix provides a cloud software platform that powers hybrid multi cloud infrastructure, modern applications and data services for enterprises and governments.

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

• Although migration away from Broadcom owned VMware is creating a multiyear opportunity to win new workloads, the need to phase license start dates with complex migration time lines could keep a growing portion of billings from converting to in period revenue and mute reported topline growth.
• While customers are increasingly standardizing on hybrid multi cloud architectures that favor Nutanix’s platform approach, a structurally larger mix of business routed through OEM partners like Cisco and Dell means revenue is only recognized when appliances ship. This can compress near term revenue growth versus bookings.
• Although AI and modern application initiatives are beginning to land full stack Nutanix deployments that can expand ARR per customer, extended proof of concept cycles and constrained hardware availability for AI infrastructure may delay broader rollout and slow the pace of ARR and revenue acceleration.
• Despite strong free cash flow generation supported by upfront invoicing on multiyear contracts, higher usage of flexible start dates and partner payouts could cap operating leverage and limit further expansion in operating and net margins if revenue recognition continues to lag bookings.
• While growing adoption of Kubernetes, database as a service and unified storage on a common platform supports larger long term customer spending, the shift to larger initial land deals and complete estate migrations can reduce visible expansion rates and weigh on net retention and earnings growth in the medium term.

Assumptions

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

• The bearish analysts are assuming Nutanix's revenue will grow by 9.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.4% today to 18.0% in 3 years time.
• The bearish analysts expect earnings to reach $622.8 million (and earnings per share of $2.09) by about December 2028, 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 bearish analyst cohort, the company would need to trade at a PE ratio of 30.4x on those 2028 earnings, down from 58.3x today. This future PE is lower than the current PE for the US Software industry at 32.9x.
• The bearish analysts expect the number of shares outstanding to grow by 0.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.77%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structural shift toward contracts with future license start dates and greater use of OEM channels means a rising portion of bookings may be recognized later. This could depress reported revenue growth and delay the inflection in earnings that investors are expecting, even if demand and cash collection remain solid, ultimately weighing on revenue and earnings.
• If migrations off VMware prove slower, more complex or smaller in scope than anticipated, particularly for large enterprises with entrenched Broadcom relationships and hardware dependencies, Nutanix may capture a lower share of this secular opportunity than hoped. This could limit long term ARR growth and constrain net margin expansion tied to operating leverage.
• Growing dependence on third party OEM partners such as Cisco and Dell, combined with emerging component shortages and longer hardware lead times from the industry wide AI build out, introduces an external bottleneck that Nutanix cannot directly control. This could cause persistent gaps between bookings and recognized revenue and could pressure earnings visibility.
• As Nutanix balances investments in Broadcom migration support with newer priorities like Kubernetes, database services and enterprise AI, there is a risk that R&D and go to market resources become stretched. This could slow innovation or weaken competitive differentiation in key product areas, which could limit pricing power and compress net margins.
• Net retention has stabilized rather than accelerated and larger initial land deals that fully migrate estates upfront can mathematically dilute visible expansion. If expansion activity does not reaccelerate or if customers increasingly treat Nutanix as a one time migration project rather than an expanding platform, long term ARR growth and earnings compounding could fall short of expectations.

Valuation

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

• The assumed bearish price target for Nutanix is $53.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.5 billion, earnings will come to $622.8 million, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $47.58, the analyst price target of $53.0 is 10.2% 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.