Buy this Cloud stock before it jumps higher

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The hyperconverged infrastructure (HCI) market is a growing cloud computing vertical. It plays an important role in reducing the complexity of data centers by combining networking, storage and computing into a single platform. The impressive results of Nutanix (NASDAQ: NTNX) recent quarters suggest that this could be one of the best ways to exploit this lucrative opportunity. The company offers a scalable hybrid cloud platform through a subscription-based model, which enables customers to manage different cloud environments according to their workload requirements, simplifying operations and reducing operating costs in the process. .

NTNX data by YCharts

The hybrid cloud specialist’s shift to a subscription-based business model has paid off, leading to increased margins, higher recurring revenues and an increase in annual contract value (ACV). As such, it was no surprise to see Nutanix crush expectations on Wall Street when it released its fourth quarter fiscal 2021 results on September 1.

Nutanix’s better-than-expected performance has resulted in a sharp rise in the company’s stock price, with the stock rising nearly 20% since the report. Let’s take a look at what worked for Nutanix in the last quarter and why this cloud computing stock could skyrocket.

Subscription activity achieved a record quarter

Nutanix’s fourth-quarter revenue increased 19% year-over-year to a record $ 391 million. The company noted that this was its fastest pace of revenue growth in the past three years. Additionally, Nutanix ACV billings increased 26% year-over-year to $ 176 million, again a record high and the fastest growing in over two years. .

It’s also worth noting that Nutanix’s annual recurring revenue jumped 83% year-over-year to $ 879 million, while ACV at run rate increased 26% year-over-quarter. from last year to $ 1.54 billion. For the year as a whole, Nutanix posted 7% revenue growth to $ 1.39 billion. All of these measures point to a bright future for Nutanix sales.

The annual contact value, or ACV, represents the total value of a contract divided by the number of years of the contract, and excludes money received from the sale of equipment and the provision of professional services. LCA billings represent the total LCA of all contracts that were billed during the quarter, and consist of both new billings and renewals. The LCA at the execution rate is the sum of the LCA of all contracts that were in effect at the end of the quarter.

The fact that these metrics have grown at a faster rate than Nutanix’s actual revenue indicates strong demand for the company’s subscription offerings, which grew at a formidable pace last quarter. The company’s subscription revenue grew nearly 24% year-over-year in the quarter to $ 352.2 million, representing 90% of total revenue. Professional services revenues jumped 83% year over year to $ 22.3 million.

Two women inspecting a server in a data center.

Image source: Getty Images

Meanwhile, legacy business – non-portable hardware and software – has continued to shrink as Nutanix completes its transition to a subscription-based model. Together, these traditional businesses generated just over $ 16 million in revenue in the last quarter, down almost half from the previous year.

Nutanix’s revenue growth can be stepped up a notch thanks to its strong subscription pipeline and rapidly growing customer base. Nutanix ended the quarter with a cumulative number of customers of 20,130, an increase of 16% from the previous year. More importantly, the company has also seen an increase in spending from its customers.

The number of Nutanix customers with lifetime bookings over $ 1 million increased 25% year-over-year to 1,512. It should be noted that Nutanix saw a 42% increase in sales. year-over-year number of customers with over $ 10 million in lifetime bookings.

In the Software as a Service (SaaS) industry, Lifetime Reservations (or Customer Lifetime Value) refers to the revenue generated by a customer after deducting the amount spent to acquire and maintain that customer. Thus, increasing this metric indicates that Nutanix customers are spending more on its services, which should eventually lead to improved performance in terms of revenue and bottom line.

Unsurprisingly, Nutanix ended fiscal 2021 with an adjusted gross margin of 82.3%, up one percentage point from the previous year. In addition, customer loyalty and contract renewals at Nutanix indicate that the company is building a long-standing customer base. For example, its 158% net dollar retention rate for subscription activity exceeded the company’s expectations by 155%. The dollar net retention rate compares Nutanix’s annual recurring revenue (ARR) at the end of a period to the ARR of the same cohort of customers at the start of that 12-month period.

Why Nutanix will get better

Nutanix’s advice is proof that the company will continue to stay on the fast lane. Management expects ACV billing to be between $ 172 million and $ 177 million in the first quarter of fiscal 2022, an increase of 25% to 28% from last year. This would be a major step up from the 10% growth in ACV billing that Nutanix had seen in the previous year period. ARR is expected to jump 65% or more this quarter from a year ago.

More importantly, the potential of the HCI market should ensure sustained growth for Nutanix in the long term. A third-party report estimates that the HCI market could generate $ 27 billion in revenue by 2025, registering a compound annual growth rate of over 33%. Nutanix itself sees an addressable market worth $ 30 billion by 2025 in HCI.

Unsurprisingly, Nutanix estimates that its ACV billings could continue to grow by more than 25% per year until fiscal 2025. 2025, compared to 79% for fiscal 2020.

All of this indicates that Nutanix’s financial results will improve in the long run, which is why investors looking to add cloud stock to their portfolios should take a closer look at this fast-growing company.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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