On Monday, Morgan Stanley upgraded Nutanix (NASDAQ:NTNX) stock, a cloud computing company, from Equalweight to Overweight. The firm also slightly increased its price target for the stock from $71.00 to $72.00. The upgrade is based on the potential for Nutanix to capture 1-2% of VMware (NYSE:VMW)'s install base annually over the next five years.
This market share gain is expected to boost Nutanix's growth rate by 200-500 basis points, presenting an attractive investment opportunity at the current valuation, which is 23 times the forecasted fiscal year 2026 enterprise value to free cash flow (EV/FCF).
Morgan Stanley's positive outlook is also influenced by several factors that are now contributing to a more favorable view of Nutanix's prospects. Firstly, the expansion of the company's sales channels through partnerships with Cisco (NASDAQ:CSCO) and Dell (NYSE:DELL), combined with effective incentive programs, have shown promising results in the fourth fiscal quarter. Secondly, a deal with Dell involving PowerFlex technology is anticipated to remove obstacles to adoption by allowing Nutanix's solutions to work with certain existing 3-tier architectures.
Moreover, as the acquisition of VMware by Broadcom (NASDAQ:AVGO) is now a year into completion, contracts are nearing their expiration, which could lead to more customers transitioning to Nutanix. Although the analysts believe that the latter two factors may not significantly drive upside until later in fiscal year 2025, the current channel expansion and the continued upside to free cash flow valuation justify the upgraded rating.
Morgan Stanley's analysis in March had previously expressed caution regarding the timing of these growth opportunities, particularly due to the need for server upgrades, as approximately 80% of VMware's installed base was still using a 3-tier architecture as opposed to hyper-converged infrastructure (HCI). However, recent developments have provided a more optimistic outlook for Nutanix's ability to penetrate the market and grow its customer base.
In other recent news, Nutanix Inc . reported an 11% year-over-year increase in Q4 revenue, reaching $548 million, and a 15% rise in full-year revenue to $2.15 billion. The company's Annual Recurring Revenue (ARR) and Annual Contract Value (ACV) billings also saw growth, increasing by 22% and 21% respectively.
Nutanix has also secured several large deals, including a multimillion-dollar agreement with a Fortune 100 financial services firm. Following these developments, RBC Capital and JPMorgan have upgraded their price targets for Nutanix to $75. Looking ahead, Nutanix expects its fiscal year 2025 revenue to be between $2.435 billion and $2.465 billion, with non-GAAP operating margins ranging from 15.5% to 17%.
Furthermore, Nutanix announced the upcoming retirement of its Chief Operating Officer, David Sangster, effective October 31, 2024. The company also disclosed the fiscal year 2025 compensation details for its top executives, including a base salary of $800,000 for President and CEO Rajiv Ramaswami.
InvestingPro Insights
Recent data from InvestingPro adds weight to Morgan Stanley's optimistic outlook on Nutanix (NASDAQ:NTNX). The company's market capitalization stands at $16.5 billion, reflecting investor confidence in its growth potential. Nutanix's revenue for the last twelve months as of Q4 2024 reached $2.15 billion, with a solid revenue growth of 15.35% over the same period. This aligns with Morgan Stanley's expectations of increased market share capture from VMware's install base.
InvestingPro Tips highlight that Nutanix operates with a moderate level of debt, which could provide financial flexibility as it pursues growth opportunities. Additionally, the company boasts impressive gross profit margins, with the latest data showing a gross profit margin of 84.94% for the last twelve months as of Q4 2024. This strong profitability metric supports Nutanix's ability to invest in sales channel expansion and technology partnerships, as noted in Morgan Stanley's analysis.
Another InvestingPro Tip indicates that 8 analysts have revised their earnings upwards for the upcoming period, suggesting growing confidence in Nutanix's near-term performance. This aligns with Morgan Stanley's view on the company's improving prospects, particularly as VMware contracts approach expiration and potential customer transitions accelerate.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for Nutanix, providing a deeper understanding of the company's financial health and market position.
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