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Nutanix (NTNX) Plunges 8% After HPE Denies Acquisition Talk

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Nutanix (NTNX - Free Report) shares fell nearly 8% last Friday after Hewlett Packard Enterprise Company (HPE - Free Report) denied any acquisition talk with the cloud computing company. Hewlett Packard’s statement came after the Dealreporter reported that HPE is no longer in negotiation with NTNX for a potential acquisition.

Bloomberg reported earlier this month that Hewlett Packard held discussions to acquire Nutanix. In October this year, the Wall Street Journal reported that Nutanix is likely to aim at private equity and strategic buyers who are willing to pay a significant premium over its current valuation, which was around $5 billion at that time.

What Makes Nutanix a Takeover Target?

Nutanix is considered a pioneer in the hyper-converged infrastructure (HCI) market, which is projected to grow rapidly in the long term. Gartner recognized the software maker as a 2022 Gartner Peer Insights Customers’ Choice vendor for HCI for the fourth time.

Nutanix Price and Consensus

Nutanix Price and Consensus

Nutanix price-consensus-chart | Nutanix Quote

The strong adoption of Nutanix products and a high customer satisfaction rate are helping the company expand its customer base. NTNX’s built-in hypervisor has been gaining significant traction as customers continue to select it as a low-cost alternative to other vendor offerings.

Moreover, Nutanix’s cloud-based deployment strategy is a differentiator. The company’s Xi Cloud Services are expected to challenge AWS, Microsoft Azure and Google Cloud in the infrastructure-as-a-service market.

Nutanix reported its first-ever quarterly profit in the last reported quarter. In the first quarter of fiscal 2023, Nutanix reported non-GAAP earnings of 3 cents per share, a significant improvement from the year-ago quarter’s loss of 22 cents per share. Quarterly earnings also compared favorably with the Zacks Consensus Estimate of a loss of 12 cents per share.

Nutanix’s growing recurring revenue stream reflects customer loyalty to its solution portfolio, which improves the visibility of its revenue growth trajectory. In the latest quarterly release, the company added 530 new customers, bringing the total client number to 23,130. Further, NTNX’s transition to software-only sales is expected to significantly boost the gross margin.

We believe that Nutanix’s remarkable transformation journey from a loss-making company to a high-growth recurring revenue-generating firm makes it a lucrative takeover target.

The company reported revenues of $1.58 billion in the first quarter of fiscal 2023, up 15% from the year-ago quarter. Subscriptions, Non-Portable Software, Hardware and Professional Services accounted for 93%, 1.8%, 0.1% and 5.1% of revenues, respectively.

Further, Nutanix is a cash-rich company, which ensures that it can pursue strategic acquisitions and investments in growth initiatives. As of Oct 31, 2022, the company had cash, cash equivalents and short-term investments of nearly $1.39 billion.

Though most of the technology sector stocks have been hit hard due to several economic issues, including the Federal Reserve’s aggressive interest rate hikes, the Russia-Ukraine-war-led energy crisis and the persistent inflation over the last year, Nutanix stands strong.

Shares of Nutanix have soared 70.1% in the past six months, while the Zacks IT Services industry has plunged 8.9%. Despite this upswing, NTNX stock is still trading 23.8% lower than its 52-week high of $33.73.

Nutanix currently trades at a forward 12-month price-to-sale multiple of 3.14, significantly lower than the five-year high of 8.16 and the Zacks IT Services industry’s average of 4.25. However, the strength of Nutanix’s fundamentals and solid prospects, along with attractive valuations, makes the company a lucrative acquisition target.

Zacks Rank & Key Picks

Currently, Nutanix and Hewlett Packard each carry a Zacks Rank #3 (Hold). Shares of NTNX and HPE have plunged 19.3% and 0.1%, respectively, year to date (YTD).

Some better-ranked stocks from the broader technology sector are Celestica (CLS - Free Report) and Zscaler (ZS - Free Report) . Celestica sports a Zacks Rank #1 (Strong Buy) at present, while Zscaler carries a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Celestica’s fourth-quarter 2022 earnings has increased by 9 cents to 53 cents per share over the past 60 days. For 2022, earnings estimates have moved up 9.4% to $1.86 per share in the past 60 days.

CLS' earnings beat the Zacks Consensus Estimate in each of the preceding four quarters, the average surprise being 11.8%. Shares of the company have declined 2.4% YTD.

The Zacks Consensus Estimate for Zscaler's second-quarter fiscal 2023 earnings has been revised 3 cents upward to 29 cents per share over the past 30 days. For fiscal 2023, earnings estimates have moved up by 6 cents to $1.23 per share in the past 30 days.

ZS’ earnings beat the Zacks Consensus Estimate in the preceding four quarters, the average surprise being 27.3%. Shares of the company have declined 66.1% YTD.

In-Depth Zacks Research for the Tickers Above

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