Nutanix: Transformation Almost Complete
- Nutanix continues to trade at a significant discount to peers, indicating investor skepticism of their business.
- Nutanix’s growth and margins have been depressed as a result of their business transformation. This transformation is almost complete though, meaning the negative financial headwinds should begin to subside.
- Performance of the underlying business remains strong across a broad range of metrics like gross margins, customer acquisition, customer satisfaction and product development.
Nutanix (NTNX) is a leader in the rapidly growing hybrid cloud market and a pioneer in Hyper-Converged Infrastructure (HCI). They became deeply undervalued due to stagnant growth during a transition from hardware sales to subscription software sales and the stock is yet to fully recover. This transformation is now largely complete and Nutanix may be on the verge of returning to growth and improving margins. Although the transformation appears to have been successful, Nutanix’s stock continues to be valued as if it were a failure. This provides investors with significant upside potential once inflation fears recede and Nutanix’s revenue growth and operating profit margins improve.
HCI is a foundational platform for hybrid cloud and multi-cloud computing, providing an improved method of managing IT infrastructure. While cloud computing has many advantages, it has created IT challenges, including:
- Complex, manually managed, siloed infrastructure
- Difficult to quickly provision and deploy apps
- Ongoing struggle to keep apps and data secure / compliant
- Operating a hybrid cloud is complex
- Difficult to move apps across platforms and requires code changes
- Unpredictable costs
Hybrid cloud computing is a large and growing market which combines the agility and simplicity of the public cloud with the predictable costs and control of on-premises infrastructure. A large majority of IT managers plan to migrate or repatriate workloads from public clouds to on-premises for ease of management and improved cost control. In a recent survey 86% of respondents stated that they consider hybrid cloud their ideal operating model, in addition multi-cloud strategies are now the enterprise norm.
HCI, when based on a well-designed architecture, replaces the complexity of conventional infrastructure with simple building blocks that scale out to add capacity and performance. HCI can optimize utilization rates, increase IT agility, enable management from a single console and create a consistent experience across platforms. HCI is also 100% software-defined, so that there is no lock-in to proprietary hardware.
Organizations are utilizing HCI for a wider set of enterprise workloads with an emphasis on new software capabilities like orchestration in a multi-cloud world. Gartner predicts that by 2025, 80% of organizations will be using HCI solutions, doubling from 40% in 2020. The global HCI market is expected to grow from 7.8 billion USD in 2020 to 27.1 billion USD by 2025, at an annual rate of 28.1%.
Major growth drivers for the market include digital transformation initiatives and the increasing importance of cloud computing. In a recent survey 76% of respondents said COVID-19 has caused IT to be viewed more strategically in their organization, which may support growth as businesses look to reduce IT complexity and cost.
Figure 1: HCI Market Growth Drivers
Nutanix’s solutions help customers to implement hybrid and multi-cloud infrastructure and aim to make computing invisible. They are also platform, app and cloud agnostic and deliver a unified fabric across multiple clouds (public or private), ensuring ease of use, scalability and portability.
Figure 2: Nutanix Services
Nutanix’s platform can be viewed as an OS for the cloud era, which subsumes compute, storage, virtualization and automation, thereby eliminating fragmented IT. It is the abstraction layer that sits above public and private cloud interfaces and automation services, allowing disparate systems to be governed from a unified console. Nutanix’s former CEO believes that in the last two decades, Amazon (AMZN) and Nutanix were the only new operating system companies.
Figure 3: Traditional Technology Stack Versus Cloud Technology Stack
(source: Created by author)
The HCI market is consolidating, with large tech players making acquisitions to gain a foothold in the market. Nutanix is a technology leader in the market but they do not have the broad portfolio of solutions or resources that many of their competitors have. To improve their competitive position and expand their addressable market, Nutanix has introduced a number of new products which build on the capabilities of their core platform. Distributed storage and the hypervisor are the core of Nutanix’s platform, but they also offer a range of solutions like networking and security, disaster recovery, desktop-as-a-service, database-as-a-service and containers.
Figure 4: Enterprise Technology Stack
(source: Adapted by author from Gartner)
Adoption of emerging products has been relatively strong so far and continues to improve. New Annualized Contract Value (ACV) from emerging products was up 100% YoY in Q4 2020and the emerging product attach rate is now 37%. Approximately 15% of ACV is coming from new products and if these products continue to perform strongly, they could be a significant driver of growth going forward. In addition, nearly half of the Fortune 100 have adopted Nutanix’s emerging products. In particular, Nutanix’s data center solutions, Files and Flow, as well as their DevOps and database-as-a-service solutions, Calm and Era, are performing strongly. Nutanix has singled out their Era solution as having great momentum and market fit and being a competitive differentiator going forward. Era has excellent economics with large databases (Oracle, SQL, SAP) and Nutanix has made the product user friendly, resulting in positive feedback from database administrators.
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