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5 Reasons Why You Should Avoid Nutanix

May 05, 2020 9:27 AM ETNutanix, Inc. (NTNX)28 Comments


  • Nutanix stock is less than 30% of what it was in 2018. It is currently very undervalued.
  • There are alarm bells that investors should be aware of, including negative free cash flow, negative total common equity, and extremely high SG&A expense.
  • I suggest waiting for the company to complete transformation to subscription and for the pandemic/recession to play out before investing.
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Nutanix, Inc. (NASDAQ:NTNX) once was considered a very promising high growth stock investment and a leader in the hyper-converged infrastructure market once had a CAGR in excess of 40%.

Nutanix TCV Revenue Growth

(Source: Nutanix)

But the company has embarked on its own transformation from hardware to software subscription at an accelerated pace, "clouding" its performance over the short term (Sorry for the pun). Conversion from point-of-sale to subscription gives the appearance of reduced revenue growth and compressed margins until the transformation is complete.

This is one reason why Nutanix stock has been beaten up. After reaching an all-time high of ~$60 in the summer of 2018, the stock price has been in decline ever since and now trades near $18.

Nutanix stock chart

(Source: Yahoo Finance/MS Paint)

While many analysts consider the stock to be severely undervalued at present, I urge investors to be cautious as the pandemic and recession play out. Below I am providing 5 reasons why you might want to hold off on investing in Nutanix this year.

Negative Free Cash Flow Margin

Nutanix has a history of negative free cash flow. While it briefly turned positive in January of 2019, it is now plummeting. The CFO indicated in February that the company planned for ~-$250 million in free cash flow in 2020. This was before the full effect of COVID-19 was known or appreciated.

Nutanix historical free cash flow margin

(Source: Portfolio123/MS Paint)

High Level of SG&A Expenses

Nutanix has an extremely high level of SG&A expenses relative to sales, 140% to be exact.

Note: SG&A expense margin includes R&D and associated stock-based compensation.

Nutanix historical SG&A Expenses to Sales Margin

(Source: Portfolio123)

This means that the company is spending 40% more on SG&A plus R&D than its revenue intake. It is unlikely that Nutanix will have positive earnings for the foreseeable future, and given the current global environment, losses could be much higher than in the past.

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This article was written by

Steve Auger profile picture

I have been trading stocks, commodities, and options for more than 25 years. I have honed my skills in quantitative analysis and various stock investment tools for 15 years at Portfolio123 and offer services as a consultant in stock portfolios. I also own the financial data service Equity Analytx which provides aggregated fundamentals for a wide range of industries.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (28)

@Steve Auger , In the near term to which company do you compare this with? They are trying to demonstrate as software company.
Will it ever be compared with CRM or ADBE or what is your thought?
Steve Auger profile picture
Perhaps Cloudera
You helped people dump the stock and scare away others and helped them lose a 20% gain. Releasing this right before their earnings call... was a gamble, if they missed expectations they would have dropped 10% and you would've look like a genius.
i do own NTNX, some at low 18s, and I am frustrated at them dropping the ball on certain things I chalk it up to growing pains, like adobe but not as successful but also not as bleak as you have indicated. With their lower overhead (since laying off a bunch of.. perhaps not best skilled EEs) their next quarter can be better than this one. Adobe had to wait many quarters before seeing the change in billing models come to fruition. With the economy strengths shifting to remote and technology I would rather own this then USO, cars, ships, rigs
Steve Auger profile picture
"You helped people dump the stock and scare away others and helped them lose a 20% gain."

This isn't my first negative article on NTNX and it wasn't published right before their earnings call. This was a pre-announcement that came about by surprise. The earnings call will be near the end of the month.

The fact that they pulled guidance for 2020 should give investors cause for concern... Give this stock some time and I will look like a genius again, just like I looked when my previous article on this company was published.
Although it was terrible timing, I agree it’s way to early to take a victory lap. Worth a gamble at 12, not a buyer at 22
@Harold Wong

Please. They only went up because of other cloud plays going up MUCH more than the piddly amount of NTNX. You obviously haven't been burned to a crisp by this company.

Growing pains? That's been going on for a year. Always excuses by an incompetent CEO who has a screw loose.

You compare this to "rather own" then USO, cars, ships, rigs. You've chosen among the bottom of no-touch stocks. Some comparison.
AlessandroDiRoma profile picture
Stock based compensation may not affect cash flows but it dilutes all existing shareholders which is arguably worse.
A problem with every tech company splk now wday twtr..
Up $2.65.
Isn't it surprising this article came in on the day Nutanix preliminary revenues topped expectation ?.
I am in IT and have significant insight into company's positive aspects too. I think company had flaws but has made corrections and even got new big deals which they will prob disclose in upcoming earnings. Its on growth trajectory right now. The stock is destined to go up tomorrow and a lot more up in coming days.
alphajumbo profile picture
Well clearly Nutanix decided to go the high growth and high spending route in order to gain substantial revenue growth and market share in the very hot HC cloud market. the losses might be worrisome in the current conditions but some companies have tried this approach and succeeded. What is needed however is a sense when cash flow will get positive so that the risk of the company diminished. On that front the move to software and subscription is the good one but it has taken more time than initially planed. What you are not taking into account in your analysis is that the stock is selling at a very low price to sales which provides a floor to the stock. The company is probably one of the best takeover candidate in the software industry because of 1) its great technology 2) low valuation in terms of price to sale which could make it quickly accretive to the acquirer earnings 3) the pandemic situation and the work from home should give companies that can solve and fasten solutions a hedge. Yesterday Nutanix preannounced better revenue because of the pandemic. The market will quickly re-evaluate the situation and the stock could quickly reach 30 again.

All mumbo jumbo. Here's a comparison between CRM and NTNX Beam. It clearly shows CRM is cheaper and offers far more.


And, a small quote from it:

"What is better Salesforce Platform or Nutanix Beam? The best IT Management Software is a product that can tackle your company’s specific requirements. It is possible to determine which alternative is best suited for your business if you assess a wider range of products before you decide which one is the best.

For instance, Salesforce Platform and Nutanix Beam are scored at 9.3 and 7.6, respectively, for overall quality and performance. Similarly, Salesforce Platform and Nutanix Beam have a user satisfaction rating of N/A% and 100%, respectively, which shows the general response they get from customers. Even better, talk to a regular client of the software and ask for their comments about the application in question."
Incredible timing.
I owned it in the past and was very lucky to get out before losing money when I bought it back. Another Cramer stock that died. It is no wonder he blocks my tweets.
great timing
@f cionek

I join you in being under this pathetic recommendation by Cramer. He is as bipolar as they come.
RickinMiami profile picture
Solid reasoning and perspective.
We have Nutanix equipment and its transformative for DB Web Apps and IT. But these issues are real and company plan is to invest in high growth now and market share. If so these negatives will pay off in the long run
Here's some horrid data from ShortSqueeze:

Short % Increase / Decrease 11 %
Short Interest (Shares Short) 12,410,000
Short Interest (Shares Short) - Prior 11,220,000

% From 52-Wk High ($ 40.10) -56.01%
% From 50-Day MA ($ 18.79) -6.14%
% From 200-Day MA ($ 26.02) -32.21%
% From 52-Wk Low ($ 11.31) 55.97%
52-Week Performance -54.40%

NTNX and its crew's performance? BEYOND ABYSMAL!
Thanks for the analysis. Good overview of the risks. But I am counting three reasons to avoid Nutanix, not five :) And I am missing the good points of Nutanix f.e. market leader, growing customer base, highly innovative etc.
Sorry there are five
Ok so I should wait for the transition to be completed and for the Company to return to a p/s ratio which is normal for a SAAS-Company growing at 25-35%? Doesn't make that much sense to me.
When you make an analysis about a company it would be great to speak about the growth prospects, about the potential impact in this situation and about the valuation at this point in time.
You are completly right, there are things to be cautious about but the P/S ratio is 2.65 at the Moment so don't you think most of your points are priced in? If not, what would your target be for a market leader in this segment? In my view your analysis is just a list of possible landmines (are they really? What are the effects of negative common equity in one month?) to justify your prefabricated opinion about a stock.
Steve Auger profile picture
I believe that I am being pretty fair if not generous in my observations. Thanks for commenting.
Not really but thanks for the reply.
Steve Auger profile picture
"What are the effects of negative common equity in one month?"

I would like to point out that the common equity would be much more negative if not for the extremely large amount of SBC being handed out like candy.
@Steve Auger

Thanks again for a level-headed, real analysis of this landmine of a company. Quoting:

'There are alarm bells that investors should be aware of, including negative free cash flow, negative total common equity, and extremely high SG&A expense."

This CEO and crew are a clever, deceitful bunch, and make their job one to deceive others to think they are doing so great, when they doing squat. It has driven market fools to buy this severely-handicapped company that can't figure its way to compete with its rivals. That is the only reason it has risen the few dollars from its low that it has.

Like an army of others, I'll be sitting here with huge losses, not knowing how to proceed other than to take these losses, or live with the foolish hope that NTNX will change. But, I highly, highly doubt that.
chupa-cabra profile picture
Good comment Technosemi.
Top execs turnover indicates company is rotting from within. Trouble is they never get rid of bad apples like CIO. There are numerous articles praising her achievements and care for employees but she's inhumane and clueless.
My wrongful job termination in their IT Swamp is a result of it. They did not give a damn about innovations coming from a person with over 25 years of open source software experience that was working very hard in their IT trench lines.
Nutanix is replacing Americans with inexperienced people from CEOs homeland. A number of engineers (?) came without "basic knowledge of Linux" to work as programmers on company core product. This is clear indication of high level of H-1B visa fraud.
Thanks for the article explaining negative cash flow Steve. I'll trim whatever was left after they stole 1/3rd of my ISOs 13 months ago. I already returned jacket and such with Nutanix logo to top execs. Nothing to be proud about NTNX anymore.

Thanks. All your comments are on target. This mess of a SaaS play has done NOTHING but lose people money. Except those who bought it at its abysmal low, and this head fake up occurred.

NTNX indeed "is rotting from within. Pandey and his lemmings should be replaced. They need a big activist shareholder, but there are NO interested parties, as they see what a loser this junk stock really is.

It is just HERE that the NTNX pumpers are misleading those, and are misled themselves, into thinking this company will go anywhere.
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