Nutanix IPO Valuation Is Worth The Wait

| About: Nutanix (NTNX)

Summary

Virtualization software company Nutanix wants to raise $174 million in its IPO.

The company is valuing itself at $1.67 billion, a discount to its previous $2 billion private valuation.

NTNX is an extremely high growth company, with high and growing gross margins too.

Revenues grew at 84% YoY, to reach $445 million in FYE 2016.

The $1.67B valuation is reasonable, and I reiterate my BUY recommendation for this technology high-flyer.

Nutanix (NASDAQ:NTNX) is a datacenter virtualization software technology company "unicorn" that has set the expected range and valuation for its anticipated IPO.

The company is offering a total of 14 million shares to the public and 2.1 million shares to underwriters at a midpoint price of $12 per share.

Net proceeds to the company are expected to be $174 million assuming 16.1 million shares are sold, and the company market cap upon IPO would be $1.67 billion.

No shareholders are selling shares in the proposed offering, so all the net proceeds will go to the company, which it says will be used for the standard boilerplate reasons of general corporate purposes, capital expenditures and potential acquisitions.


Company Recap

In my original analysis of the company and its IPO prospects, Nutanix Is A Unicorn Getting Ready To Fly Its IPO, I was enthusiastic about Nutanix' future prospects.

The company simplifies datacenter cloud operations for Global 2000 companies by integrating server and storage resources inside the datacenter via its virtualization products.

This helps enterprises streamline their IT infrastructure operations, thereby reducing costs and increasing operational flexibility.

Nutanix is growing topline revenues at a torrid pace, with some cooling in FYE 2016:

FYE 2016: $445 million, 84% growth over prior

FYE 2015: $241 million, 90% growth over prior

FYE 2014: $127 million

Gross margin is high and increasing, with FYE 2016 showing 62% vs. FYE 2015 58%.

The company is spending heavily on Sales & Marketing and R&D, resulting in an FYE 2016 net loss of $169 million.

NTNX had $99 million in cash as of July 31, 2016 (Unaudited).


IPO Valuation

In my original analysis, I indicated that the company's most recent private market valuation was publicly reported as $2 billion, as of August 2014.

I also stated that due to the company's rapid growth, high gross margin and high customer upsell rate of 80%, the IPO was worth considering, assuming valuation was "within range of its most recent $2 billion valuation."

Below are two valuation calculations to test that assertion:

Price/Sales Valuation Method

Nutanix wants to effectively value itself at 3.7x trailing 12-month sales. By comparison, direct competitor VMware's (NYSE:VMW) Price/Sales multiple is 4.52.

Considering VMW's revenue growth of 6% vs. Nutanix' 84%, this would imply that Nutanix is cheaply valued at its proposed IPO valuation.

EV/Sales Valuation Method

VMware currently has an EV/Sales value of 3.51x.

Nutanix' EV/Sales calculation results in a value of 3.7x, so essentially similar to that of VMware.

Based on the two valuation approaches, the NTNX IPO valuation of $1.67 billion is reasonable, and I reiterate my buy recommendation for this ultra high-growth technology company IPO stock.

Even though the IPO is at a "down round valuation" of $1.67 billion when compared to its most recent private financing valuation of $2 billion, and most likely contains extra shares for investors at the $2 billion valuation in the event of a lower IPO valuation, the post-IPO valuation is still compelling for new investors.

Existing shareholders, some of whom acquired shares at the $2 billion valuation mark in August 2014, are holding on to their shares on the expectation that its public market valuation will increase significantly.

That is my expectation as well. I'm bullish on the IPO for NTNX.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.