Nutanix, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Nutanix, Inc. is a cloud computing company that provides a hybrid cloud platform with software and cloud solutions, designed to simplify the operation of data centers and hybrid, multi-cloud environments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Nutanix operates in the hyperconverged infrastructure (HCI) market, where they offer a unified platform that integrates compute, storage, and networking resources, simplifying IT infrastructure management for enterprises.

Business Overview Nutanix operates within the competitive landscape of the hybrid cloud market. Its offerings are designed to enable organizations to build and manage their own private cloud infrastructure, while simultaneously facilitating the integration of public clouds, if necessary. In simple terms, their main value proposition is to create cloud environments with software and cloud solutions.

  • Revenue Distribution:
    • Nutanix derives revenue from several streams, but its core is its subscription services. These include software licenses and support subscriptions for the Nutanix Cloud Platform and other software offerings. Sales can be via direct and channel partners.
    • Additionally, the company sells hardware (though it is becoming a smaller portion of total revenue). These are generally preconfigured appliances with their software preloaded.
    • Professional services revenue, though smaller than subscription revenues, is generated by providing training, installation, and customization of the platform.
    • A large portion of the revenues are generated from sales through their channel and ecosystem partners, but also directly to customers.
  • Industry Trends:
    • The IT landscape is in a period of strong transition towards hybrid cloud infrastructure, where customers are increasingly adopting a hybrid approach to their IT needs by leveraging both on-premises private cloud infrastructure and public cloud services.
    • There is also a growing demand for simplified IT operations, allowing organizations to focus on their core business rather than on infrastructure management.
    • There are technological advancements that are rapidly changing the ways customers operate and therefore how they should spend on infrastructure.
  • Margins:
    • Nutanix’s gross margin (which calculates gross profit as a % of total revenues) sits at 72.5% for the three months ended October 31, 2023, 73.7% for the three months ended January 31, 2023, and 79.1% for the full year of 2022.
    • Nutanix has worked to bring gross margins up to the high 70%s with a stated long-term target of 80%.
    • Non-GAAP gross margins are 86.5% for the three months ended October 31, 2023, 87.2% for the three months ended January 31, 2023, and 86.9% for the fiscal year of 2022.
    • The GAAP operating margins are quite low and even negative. For the three months ending October 31, 2023 operating margin is -30.2%, and for the three months ended April 30, 2023 it is -31.1% with an even worse operating margin of -41.1% for the fiscal year 2022.
    • Non-GAAP operating margin is -7.9% for the three months ended October 31, 2023, -11.1% for the three months ended April 30, 2023, and -8.6% for the fiscal year 2022. This shows that the business is currently not profitable, with profitability still far away.
  • Competitive Landscape:
    • The HCI market is competitive, with players offering a variety of solutions. Nutanix competes primarily with cloud providers that offer hybrid cloud solutions, traditional hardware vendors, and other HCI vendors. This landscape includes both specialized players and larger tech companies, leading to strong competition on both price and features.
  • What Makes Nutanix Different:
    • Nutanix has strong market share in the HCI industry and is very specialized in its area, enabling them to provide best in class solutions for those using their specific architecture.
    • Nutanix’s product is software-defined, meaning it has a lot of flexibility and can be deployed on a wide range of hardware, different environments and clouds. This means that the company can attract a larger customer base that has different technical demands.
    • Nutanix has a single system for storage, computing, networking and virtualization, simplifying its platform.
  • Financial Health Overview
    • Despite a high amount of current assets ($1.8 billion), the company’s current liabilities are also quite high at $1.7 billion. This means the company is less flexible to take up new growth opportunities and have to continue carefully managing its liabilities.
    • The company has very little long term debt ($785 million) however its liabilities of convertible notes ($1.3 billion) is concerning. A possible dilution would not only impact shareholders, but it would also likely increase their cost of capital.
    • For these reasons, the company’s balance sheet is not very robust and therefore has a rating of a 3/5

Moat Analysis: 2/5 Nutanix’s “moat,” or competitive advantage, is limited but present with its brand recognition and customer lock in. There are a few factors that create a weak moat:

  • Network Effects: Nutanix doesn’t benefit from strong network effects, since most of its solutions are utilized within its customer base.
  • Switching Costs: The company benefits from high switching costs (once embedded with a customer) due to the complexity of IT infrastructure and the need for training employees on new systems. It is difficult and expensive to swap between infrastructure providers if all components need to be replaced.
  • Intangible Assets: Nutanix doesn’t seem to benefit too much from intangible assets such as strong branding, patents, or regulatory approvals.
  • Cost Advantages/Economies of scale: There are no unique or proprietary assets that create strong cost advantages for Nutanix. Also, the company is not known to have huge economies of scale.

Legitimate Moat Risks and Business Resilience:

  • Intense Competition: The highly competitive nature of the hybrid cloud market may erode Nutanix’s market share. New technologies and approaches are constantly being introduced and may diminish the company’s unique offerings. The increase in competition can also bring price compression and lower profits.
  • Technological Disruption: Innovation is very important in tech and, the emergence of new technology or approaches in cloud and edge computing could make Nutanix’s current solutions obsolete, leading to erosion of the moat.
  • Financial Risks: Any unexpected decline in revenue or an increase in operating expenses could put pressure on the company’s profitability and financial stability, making it hard to fund expansion or protect its market share. Macroeconomic weakness also can threaten revenue and profitability.

  • Market Saturation: As customers become increasingly reliant on infrastructure companies, or as they move to public cloud solutions, growth will naturally slow in the business, making it hard to sustain long-term growth.

    Nutanix has shown resilience by adapting its platform to a wider range of environments, and with strong recurring revenue, but may face a harder time in an increasingly competitive market and the fact that the company is losing money on operations. The ability to continue to evolve, innovate, and strengthen ties with the customer base is crucial.

Understandability: 3/5 Nutanix’s business model is reasonably complex. While the idea of a unified cloud platform for enterprises is not necessarily difficult to comprehend, the technical aspects of how such a system is designed, priced, and implemented require more sophisticated understanding. The company has a diverse set of products, services, and solutions that make up the platform, all with slightly different attributes that are intended for separate markets. Furthermore, a lot of the business relies on how it is delivered, which can be on site, via a partner, or as a service with various cloud vendors. Understanding how the company generates revenue is quite complex.

Recent Concerns and Problems

  • In the earnings call (June 2nd, 2023) the management was asked questions on the slow rate of growth, which they stated was in accordance with their forecast. There were also questions regarding how subscription bookings will affect revenue, where the company was not fully clear, and stated more details on it will be given next quarter. *The earnings call on March 1, 2023, highlighted the concern for the slowing rate of growth in new business bookings. The company also is focused on controlling expenses while going through its transition towards a recurring revenue model.
  • In a report from October 15, 2024, by Morgan Stanley, a few issues were highlighted which are still applicable today. It showed that most companies will have lower returns on invested capital (ROIC), but that there may be some that have higher ROIC, and that these will have an edge over competitors. They also stated that the ability to capture and widen an economic moat is extremely important for companies to succeed over time. Based on data from Morningstar, only 17% of 1,600 companies reviewed had a “wide moat.” The report stated that the economic moat is a useful tool for figuring out the sustainability of returns and value creation in the long term.