With markets soaring to YTD highs, many value-conscious investors are asking the same question: is it too late for me to move cash off the sidelines and throw money into the market rebound? My answer, of course, is no: but it requires thoughtful stock picking. In particular, we need to focus in companies that still have room to run from a valuation perspective, and have catalysts for growth in 2024.

Nutanix (NASDAQ:NTNX) is a fantastic choice in this regard. The hyperconverged infrastructure software company has been on a tear this year as it executed very strong top line trends amid a challenging year for IT. Up more than 75% year to date, I still believe there is more upside for next year.

I last wrote a bullish note on Nutanix, when the stock was trading closer to $36 per share. Even with the strong rally since then (which has been in concert with other mid-cap tech stocks rallying on the back of lower interest rate expectations), I think Nutanix’s stock outperformance has been accompanied by both encouraging and new growth drivers as well as meaningful profit expansion.

AI is by now a bit of a tired conversation in the markets, and the top “obvious” plays like C3.ai (AI) and Palantir (PLTR) have already seen a substantial boom and bust cycle this year. But I also think companies like Nutanix that enjoy tangential benefits to AI adoption have plenty to benefit from increased interest in automation as well.

Nutanix management believes that AI will be deployed close to where the data is stored. And that’s what Nutanix is all about: building a fast infrastructure around data that can be rapidly used for analytics. In Q1, Nutanix started selling its “GPT in a Box” solution; and to a federal agency leveraging it for a crime detection use case, no less (which harkens very strongly to Palantir’s functions). Going forward, I see many more of these use cases driving continued demand for next-gen data platforms like Nutanix - especially for those organizations that want to run AI apps outside of the cloud and in their own data warehouses.

For all these reasons, I remain quite bullish on Nutanix. As a reminder to investors who are newer to this name, here is my full updated long-term bull case on Nutanix:

• Category leader in the hybrid cloud- Though the buzzword "cloud" grabs all the media attention in the software industry these days, the reality is that many companies, especially those in complex or highly regulated industries, will never entirely move their systems into the cloud. Nutanix is a champion of the "hybrid cloud" strategy, in which some of a business's assets are in the cloud and others are in on-prem environments. For the on-prem assets, Nutanix's hyper-converged technology ensures that customers get the same performance and agility benefits that users receive in the cloud. Most companies today employ some sort of hybrid cloud strategy - meaning Nutanix products are widely applicable to all IT departments.

• AI potential- Nutanix management believes AI applications will run where the data is housed. Already, the company has signed on major deals involving AI and GPT-related use cases.

• Software-first- Earlier on in Nutanix's lifespan, the company sold server devices as its primary business, with its proprietary software overlaid as a "package solution." Now, Nutanix sells only software. This has dramatically raised its margin profile while also making it more palatable for companies who only want to consume software to run on their own hardware.

• Annual recurring revenue at the forefront of Nutanix's sales focus- At the beginning of Nutanix's fiscal 2021, the company made the earth-shaking decision to incentivize its sales staff based on ACV and not TCV. In the past, Nutanix's account executives sold longer-term contracts and incentivized customers with bigger discounts because they were paid based on the value of the total deal. What's important for Nutanix and for investors, however, is how much Nutanix can rake in annually and for each customer's lifetime. So Nutanix shifted its sales compensation in line with this priority and began paying its sales teams based on ACV - and this has yielded very strong results in growing both ACV and ARR.

• Prioritizing profitability- The company hit pro forma profitability for the first time in FY23 and is eyeing further gains ahead in FY24 on the back of a ramping gross margin profile.

In spite of these strengths, I continue to think that Nutanix trades cheaply. At current share prices near $46, the company trades at a market cap of $11.24 billion. After netting off the $1.44 billion of cash and $1.22 billion of convertible debt on Nutanix’s most accurate balance sheet, the company’s resulting enterprise value is $11.02 billion.

Meanwhile, for the current fiscal year FY24 (the year for Nutanix ending in September 2024), Wall Street analysts are expecting the company to generate $2.48 billion in revenue, representing 17% y/y growth. This puts Nutanix’s valuation at 4.4x EV/FY24 revenue.

In my view, Nutanix’s combination of top-line growth catalysts (including and especially AI-driven use case expansion) plus high gross margins that are yielding strong profit gains merit at least a 5.5x revenue multiple for the company, implying a $57 price target for the stock and ~23% upside from current levels.

Stay long here and keep riding the accurate upside trends.

Q3 download

Let’s now cover Nutanix’s latest quarterly results in greater detail. The Q3 earnings summary is shown below:

Nutanix’s revenue grew 18% y/y to $511.1 million, well ahead of Wall Street’s $500.8 million (+15% y/y) by a three-point margin. The company also saw strength in ARR adds, growing 30% y/y to $1.66 billion - a $102 million sequential increase to the recurring revenue base, up from $95 million in the previous quarter.

The company noted specific strength in the federal government sector in Q1, including the aforementioned GPT-in-a-Box deal: which was Nutanix’s first such win for the product with an existing large customer. It’s also comforting to note that public sector clients - which have a reputation for longer approval processes - have been quick to adopt new AI-related products, which is a harbinger for increased adoption to benefit calendar 2024 trends.

Nutanix has also been able to drive go-to market expansion through reseller partners. In particular, it has deepened its relationship with Cisco, whose sales team is now pushing a joint Cisco-Nutanix solution.

Still, the company is noting some overhang of macro impacts, and is also expecting some of these effects to linger into next year. Per CFO Rukmini Sivaraman’s remarks on the Q1 earnings call:

Similar to last quarter, we saw a modest elongation of average sales cycles, relative to the year ago quarter […]

We are seeing continued new and expansion opportunities for our solutions, despite the uncertain macro environment. However, as we mentioned previously, we have continued to see a modest elongation of average sales cycles. Our fiscal year '24 new and expansion ACV performance outlook assumes some impact from these macro dynamics. Second, the guidance assumes that our renewals business will continue to perform well.

And a reminder that while our available to renew, or ATR pool, continues to grow year-over-year, it is growing at a slower pace in fiscal year '24, but is expected to reaccelerate in fiscal year '25, based on our current view.”

Note that the comment on higher renewal base starting in FY25 is a great leading indicator for continued strong growth trajectory.

From a profitability standpoint, pro forma gross margins hit a sky high level of 85.9%, up 250bps y/y. Note that one of the common misconceptions of Nutanix - based on its earlier post-IPO business model - was that it sold commoditized hardware. Now with margins approaching 90% and towering over most of the software sector, it’s difficult to argue that Nutanix is anything but a software company.

Pro forma operating income of $79.5 million also notched a 15.5% margin, up from just 2.3% in the year ago quarter. Needless to say, Nutanix is truly showing the profitability potential of a more mature software company that has slowed down opex growth and is capitalizing on strong expansions/renewals.

Key takeaways

Choosing companies with both a reasonable valuation and clear catalysts for outperformance in 2024 is a critical strategy for outperforming the markets next year. Though Nutanix has already recorded plenty of gains this year, there’s still room to go even further.

Nutanix launches a new Kubernetes Platform-as-a-Service offering that CTO Rajiv Mirani says differentiates itself from VMware in the container market.

Nutanix’s innovation leader Rajiv Mirani says his company’s new Kubernetes Platform-as-a-Service offering launched today has a leg-up over its competitor VMware as Nutanix looks to take the Kubernetes market by storm.

“The reality is, our primary differentiation from VMware is simplicity. That’s always been our biggest strength,” said Mirani, chief technology officer at Nutanix in an interview with CRN. “VMware has a very complex legacy between Pivotal, the new stuff they’re doing with Tanzu and other acquisitions they’ve made – it’s kind of a mash-up of different things that makes it complicated.”

At Nutanix’s virtual .NEXT conference on Tuesday, the San Jose, Calif.-based company unleashed its new Karbon Platform Services, a Kubernetes-based multi-cloud Platform-as-a-Service (PaaS) with automated system-managed security. The cloud-native PaaS gives software developers a turnkey managed services experience on-premises, in the public cloud and at the edge, to build and run cloud native applications while enabling them to decouple applications from the underlying infrastructure.

[Related: Nutanix .NEXT 2020: 7 Biggest Product Announcements]

Nutanix has been developing Karbon for Kubernetes lifecycle management for years. The Karbon Platform Services is striving to accelerate the development and deployment of microservices-based apps across any cloud. The new PaaS offering brings automated system-managed security and multi-tenancy to run a wide range of microservices-based applications across multiple cloud infrastructures.

Mirani said Karbon Platform Services is based around simplicity, unlike VMware, which “has this very complex combination of things providing services.”

“Our aim is to make it much simpler: base it on Kubernetes so people can use the toolset they are used to with kubectl, the CLI’s they’re use to, and all the other stuff so there’s nothing new to learn. Then on the services themselves, there’s a set of artificial intelligent services we have been building overtime,” said Mirani. “Our full PaaS offering essentially takes some of the most common cloud-native services and makes them available on-premises. … We wanted to make Karbon very simple.”

VMware, for its part, is looking to dominate the Kubernetes market via its VMware Tanzu platform of services designed to deliver enterprise-grade Kubernetes at scale.

VMware’s growing Tanzu portfolio includes Tanzu Application Service, its centralized management platform Tanzu Mission Control, as well as Tanzu Kubernetes Grid that enables customers to install and run a multi-cluster Kubernetes environment on any infrastructure with built-in security. The company is also leveraging technology gained from last year’s $2.7 billion acquisition of former container standout Pivotal Software.

Customers can also combine Tanzu with other solutions such as VMware Cloud Foundation and vSphere to provide infrastructure and application management for cloud-native adoption. VMware is consistently upgrading Tanzu, including the accurate release of a new version of vRealize Suite that includes support for Kubernetes in Tanzu Kubernetes Grid.

VMware Tanzu has been gaining steam as well, said CEO Pat Gelsinger during VMware’s accurate second fiscal quarter earnings report. For example, the U.S. Space Force recently signed an “eight-figure commitment to the Tanzu platform,” he said.

Tim Joyce, president and CEO of Roundstone Solutions, an Orinda, Calif.-based Nutanix partner, believes Nutanix’s overall product line will best VMware on the Kubernetes battle front.

“Nutanix’s product line overall is very well thought out. Whereas VMware has essentially tried to cobble together a strategy based on the products they already had,” said Joyce. “Nutanix has been thoughtful in that they started in offering hyperconvergence to supply a public cloud-like experience in the data center. They’ve continued to build on that with various offers as they go along. Everything that they’ve come across fits very nicely into what they’ve already built as their base. Whereas VMware, they go out and acquire somebody and hope it works correct. That, to me, isn’t a necessarily an integrated strategy. That’s a reactive approach to, ‘Wow, we don’t have that product. We better go get it.’”

VMware has been going on an acquisition tear in 2020, gobbling up the likes of Datruim, Blue Medora, Fastline, Octarine and Nyansa. In 2019, VMware spent billions purchasing eight companies—the most acquisitions for VMware in a single year— including Avi Networks, Aetherpal, BitFusion, Bitnami, Intrinsic, Pivotal Software, Uhana, VeriFlow and its blockbuster $2.6 billion buy of Carbon Black.

On the channel front, Karbon Platform Services enables solution providers to offer managed Kubernetes, containers-as-a-service, serverless functions, artificial intelligence, services mesh and security services.

“This is another good as-a-service offering with a great Karbon product that lines up very well with us,” said Roundstone’s Joyce. “Nutanix is a cloud business now. So they have to offer things customers want -- not just so they can avoid customers going to AWS, Azure and Google Cloud -- but so they can provide real value to their own customers. That’s what they’re doing with Kubernetes PaaS.”

Other features in the new Karbon Platform Service is cross-cloud data mobility and hybrid application management through WAN-optimized data pipelines and extensible data interfaces. The Kubernetes PaaS also allows IT teams to leverage a consistent security and API model with unified observability for data and applications across cloud. It provides automated system-managed security with built-in multi-tenancy and role-based access control (RBAC) for rich services, said Nutanix’s CTO.

“Like always, Nutanix’s stance is that we’re not a forced choice,” said Mirani. “We will have Karbon Platform Services available as an option, but if people want to run a competitive product like [Red Hat] OpenShift, there’s no reason they can’t do that. Just as we’ve always had the choice like with [Nutanix] AHV or [VMware] ESX or [Microsoft] Hyper-V on our platforms. So the same freedom of choice caries over the PaaS as well. So it’s not as if they’ll be forced to use our stack.”

Mirani said he looks forward to competing against OpenShift, Tanzu and the rest of the competition in the coming years.

“Our main aim is that with the integration we provide, we’ll be giving them the entire stack a lot simpler and not a collection of different things that have to be managed separately,” he said.

Nutanix Karbon Platform Services is now generally available to customers.

‘Nutanix services will remain fully available, and the furloughs have been structured so that our customers should experience little or no changes from the normal course during this period,’ says Nutanix in a statement to CRN.

Nutanix is furloughing a total of 1,465 employees in California, representing nearly 25 percent of the company’s worldwide headcount, due to “uncertain business conditions” stemming from the coronavirus pandemic.

Nutanix confirmed to CRN that it is implementing two separate, one-week unpaid furloughs effecting at least 1,465 employees that will occur on a rolling basis effective May 4 through July 26, followed by another round from Aug. 3 through Oct. 31.

In a statement to CRN, Nutanix said it is taking “deliberate and proactive expense-reduction measures that we believe to be prudent” as the company manages through the uncertain business conditions brought on by the COVID-19 pandemic.

“These measures include two, week-long furloughs for many of our employees over the course of the next six months. Nutanix services will remain fully available, and the furloughs have been structured so that our customers should experience little or no changes from the normal course during this period,” said Nutanix to CRN. “We are taking this precautionary measure to help ensure our business remains healthy in the long term. Our philosophy as we navigate the COVID-19 pandemic is to do the ‘most good’ with the least amount of harm for all of our employees."

[Related: Nutanix Channel Chief On Driving VDI To Combat Coronavirus]

Last week, the San Jose, Calif.-based company reported to the California Employment Development Department that it was furloughing a total of 1,465 employees in California alone. A total of 1,434 furloughs will come from the company’s headquarters in San Jose, while 31 employees will be furloughed in San Francisco, San Mateo and Redding. Nutanix gave employees notice about the unpaid furloughs on April 21.

Nutanix said the furloughs will not be permanent. Nutanix did not comment on whether there are additional employees being furloughed who work outside of California.

The company reported a worldwide headcount of 6,100 during its second fiscal quarter, which ended Jan. 31, 2020, along with approximately 16,000 customers.

“Due to the COVID-19 emergency and related government order and/or instructions and/or business circumstances, Nutanix is implementing two separate, one-week unpaid furloughs,” Nutanix said in a accurate letter to the California Employment Development Department (EDD). “This action is expected to be temporary, conditioned upon the status of the COVID-19 emergency, any applicable government orders and instructions, and business circumstances at that time.”

In an interview with CRN last month, Nutanix’s channel chief Christian Alvarez said the majority of Nutanix’s global workforce is working from home.

“We are here. We are operating. We’re supporting our customers. We’re fielding support calls. We’re helping our partners with deployments. We are fulfilling deployments,” Alvarez said. “For us, aside from this horrific situation we’re all in as humans, we are full steam ahead.”

Bob Venero, CEO of Future Tech Enterprise, No. 101 on the CRN SP500, said he expects many manufacturers similar to the size of $1.3 billion Nutanix to have trouble weathering the financial impact of the pandemic.

“Some of these smaller companies like Nutanix are going to be in a very precarious situation because they don’t have the financial coffers of companies like Dell Technologies and HP Inc.,” he said. “It is going to be much harder for those smaller companies to be able to sustain current business and at the same time spend money on R&D. What we are seeing is a lot of smaller companies doing fire sales to keep sales revenue coming in.”

Venero said he expects to see more smaller companies take drastic actions like layoffs and furloughs. “I don’t think we have hit the pinnacle of the financial impact from this pandemic,” he said. “There is a financial cliff coming that a lot of companies are going to fall off of.”

In an interview last week with CNBC, Nutanix Founder and CEO Dheeraj Pandey said many of Nutanix’s sellers faced the challenge of needing to adapt to the “new reality of not having any physical meetings” with customers due to the coronavirus pandemic.

“It’s been a really good thing for us in the last one month alone to really do things digitally and virtually, but over the course of this coming six months, we’ll probably have to adapt even more so,” said Pandey.

The San Jose, Calif.-based company has launched a slew of new offerings this month to help customers and channel partners get through the economic uncertainty from COVID-19. The hybrid cloud specialist and hyperconverged infrastructure pioneer launched its new Nutanix Special Financial Assistance Program to provide channel partners with extended payment terms. The company also launched FastTrack for VDI, a new offer that enables channel partners to create a VDI environment for customers in days.

For its accurate second fiscal quarter earnings, Nutanix posted total revenue of $347 million, up four percent year over year, with software and support sales reaching $338 million, up 14 percent year over year.

Nutanix stock is down 4 percent on Monday to $17.54 per share.

This is a guest post for the Computer Weekly Developer Network written by James Sturrock in his position as director of systems engineering, UK&I at Nutanix.

Sturrock writes as follows in full…

As we look out across the topographies that today describe modern enterprise software stacks, systems and solutions, we can clearly see that Artificial Intelligence (AI) – whether that be predictive, reactive or generative AI – has now become a core mandate.

With generative AI coming to the fore and now promising to bring accelerating automation advantages to every conceivable application we use, it may appear to be a case of boiling the ocean, drinking from a firehose and moving heaven and earth for IT departments that have yet to really embark on this journey. It can certainly seem like a daunting task, so where should we start?

Firstly, let’s remind ourselves how AI should be implemented.

A before AI

Getting AI running in an already-operational business is a team effort. This means working with both data scientists and developers (plus of course business stakeholders) to bridge the gap between their worlds and be able to use AI via platforms that deliver cloud-like operations to enable seamless access to workloads and data…

Nutanix’s Sturrock: Focus on key foundational structures at the infrastructure level for AI foundation models.

… and, as a secondary but no less fundamental point here, if we had to add another A before the AI in AI, it would be accessibility, adaptability and application applicability. This means that AI-empowered applications should be accessible and adaptable from the start. Organisations need to be able to buy, build, or modify AI models and data from any source; they should then be able to run them anywhere that their business requires the injection of AI to manifest itself.

But as much as we have said thus far (and to further validate our A for accessibility) we must also remember that using generative AI should not require a fully-blown subscription to a Cloud Services Provider (CSP) hyperscaler.

Our own CEO Rajiv Ramaswami reminds us that because many IT teams are still in a prototyping phase with AI, they are almost ‘playing’ with it in terms of discovering how its benefits can be captured, harnessed and indeed monetized. But we know that AI requires solid infrastructure and there is already a shortage of GPUs. It may be easy enough to build an AI model in the public cloud, but implementation is much more cost-effective in a hybrid cloud.