Last Friday, The Wall Street Journal quoted sources as saying that Nutanix was looking for a buyer. Some may not find that surprising given Nutanix’s recent financial performance, but the question is if the company were to sell, who would be the most likely to buy it, and would it be a better fit for a large public company or a private equity firm?
(At this point we cannot resist noting that, well, we expected this.)
Nutanix helps virtualize nearly every piece of hardware required to run a data center, which it calls hyperconverged infrastructure. It actually even sells its own hardware appliance loaded with the company’s set of services as one of its delivery methods. That puts it at the center of the hybrid cloud market. I know, that’s a lot of buzz words there, but the bottom line is that it can help companies bridge the gap between their data centers and public cloud offerings from companies like Amazon, Microsoft and Google.
That makes Nutanix a pretty valuable commodity these days. In spite of the massive growth of these public cloud companies, much of the world’s workloads still live in private data centers, and finding ways to manage and connect these two worlds is a huge challenge for companies. You would assume a company like Nutanix would be in demand. In fact, it reports that more than 1,800 customers have spent over $1 million on its services.
But growth at the company has stalled lately. In Q4 fiscal 2022, revenue declined 1% to $385.5 million from $390.7 million a year earlier. The top line was also lower than the preceding quarter, when the company reported $403 million.
The good news is that despite the revenue dip, Nutanix’s annual recurring revenue (ARR) continues to rise — climbing 37% in Q4 2022 from a year earlier. Annual contract value (ACV) was also up 10% in the same period.
As you might expect, news of the potential deal has sent the company’s stock up over 5% in the last five days. To give you a sense of how the market has reacted, Nutanix shares closed at $21.15 the day before the WSJ report. Today, they are trading at over $27 per share.
While Nutanix would probably need to sell at a premium over its current market cap of over $6 billion (despite the stock price bump post the WSJ report), given some of the deals we have seen this year, it doesn’t seem out of reach of private equity firms. There have been plenty of high-brow deals this year — for example, private equity firms spent over $10 billion each for Zendesk and Anaplan in 2022.
But the cost of money is much higher now as interest rates moved to more than 5% from the glory days of close to zero. That could give pause to some.
Before we consider that further, let’s explore what a deal like this could cost.
What’s it worth?
Nutanix has yet to tell investors when they can expect its earnings results, which means we only have data through the end of July to parse and arrive at its potential worth.
It’s worth noting at this juncture just how much the company’s value has fluctuated in recent months. Before reporting Q4 results on August 31, Nutanix was worth around $3.93 billion, per YCharts data, but then its market cap soared to nearly $5.1 billion. Its value did drift down to $4.8 billion afterward, but now the buyout rumors have added another $1.4 billion to that.
To put that into perspective, Nutanix has gone from being worth less than $4 billion to more than $6 billion in just 56 days. The market is clearly working hard to understand what the company is really worth.
The company does have some strong points. Its ARR has risen around $400 million per year (considering Q4 results from fiscal 2020 through fiscal 2022), which implies that it will reach billions in accumulated annual recurring revenue in the coming years, up from around $1.2 billion in Q4. Nutanix also has a history of positive free cash flow, which means it doesn’t need to raise external capital. This could imply lower dilution for investors down the road if no deal happens.
But the company isn’t perfect: Gross margins were down slightly in Q4 from Q3 2022 and from a year earlier, and it reported its largest adjusted net loss in a year in Q4. Indeed, the revenue decline is surprising given its steadily growing ARR.
With that information and its forecast for the current year, we can do a little math to shake out what the company should, or may cost. In its new fiscal year, the company expects revenues of $1.77 billion to $1.78 billion. That’s a 12% to 13% climb, which is not very fast growth at all in the SaaS world. Such a slow pace means that Nutanix cannot expect much of a premium compared to its peers.
Per the Jamin Ball Altimeter Capital SaaS Growth Bucketing System, Nutanix counts as low-growth SaaS. The median multiple for such companies is 2.8x, as of last Friday. Presuming it reports revenue at the midpoint of its forecast in fiscal 2023 ($1.775 billion), Nutanix will be worth just about $5 billion at that multiple.
But Nutanix is close to the midgrowth bucket minimum of 15% growth per year, so we might expect it to trade between the low and midgrowth multiples. If we give it a multiple of about 4x, it would be worth about $7.1 billion.
Does that mean that an acquirer could take Nutanix off the board for $7 billion? We think not, as investors might demand more. But it does tell us that paying $7 billion for the company — a billion more than its valuation right now — would not be insane. The scale of a potential Nutanix sale, then, will preclude all but the larger private equity firms and the tech majors.
Who’s a likely buyer?
We asked a couple of analysts to consult their crystal balls and tell us if Nutanix were to sell, who would the most likely suitors be, and if it’d be a private equity firm or a public company.
Patrick Moorhead, principal analyst at Moor Insights & Strategies, doesn’t see a private equity firm jumping on the deal. “I think it’s a better fit for a public company versus private. Nutanix is a newish company (six years public) and I don’t see huge value in making it private to give it time to shed legacy,” he said.
Among the tech majors, he thinks Google Cloud, AWS, IBM and Cisco would make good suitors, as each of these companies would have different reasons to pick up Nutanix.
“As the reality of a hybrid cloud sinks in, both Google Cloud and AWS need more on-premises data capabilities. IBM and Cisco can both afford Nutanix and need more on-ramps to the cloud, which Nutanix offers. For Cisco, Nutanix gives it a hedge against VMWare and Red Hat,” he said.
Moorhead did leave a little wiggle room for a private equity approach that involved rolling up a competitor for other hybrid cloud plays. “The only exception to that would be a roll-up of companies that enable it to better compete with VMware and Red Hat.”
Holger Mueller, an analyst at Constellation Research, also sees public companies showing interest, but he doesn’t think any of the big three public cloud vendors would be interested. Instead, he pointed to vendors like HP, IBM and Dell, with the latter being the most likely to be interested, especially after it spun out VMware last year. He feels Nutanix is too expensive for HP and that IBM would confuse its hybrid cloud strategy around Red Hat if it bought the company.
That leaves Dell. “Dell has no public cloud strategy. Nutanix would enable a hybrid cloud strategy for them, especially post VMware,” Mueller said.
But this is still unconfirmed news, and until it’s more than that, we are speculating, of course. That said, it’s a useful exercise to consider where a company like Nutanix might fit if someone does decide to buy it.