To understand why this might be a concern for NTNX, it probably helps to understand its business in more detail. So, here some background:
NTNX is a developer of computer storage technology which makes it easier and more cost-effective for companies to run servers. The technology it uses is called "hyperconverged", a cloud platform that converges traditional silos of servers, virtualization, and storage into one integrated system. NTNX's platform is comprised of two software product families: Acropolis and Prism.
Acropolis is software that delivers distributed storage, application mobility capability, and a built-in "hypervisor", which is software that allows multiple operating systems to share a single hardware host. While Prism provides integrated virtualization and infrastructure management, operational analytics, and administrative capabilities.
NTNX states that its platform is much more agile that traditional data storage systems since it converges silos, virtualization, and storage infrastructure into one system. To put that benefit into some context, an IDC study indicated that customers can deploy its technology in up to 85% less time than traditional infrastructure. Additionally, with NTNX's application, infrastructure can be provisioned in minutes with one click by a single IT administrator.
Now, with Google reportedly providing enterprises with systems that combine servers, storage, and networking abilities, it's easy to see why this could be of concern for NTNX investors. It is worth noting, though, that after this story hit, multiple firms came out in defense of NTNX. For instance, Needham stated that Google's entrance into this market is unlikely because of the formal partnership it has with NTNX, which was just announced last June. The companies have agreed to work together to support customers looking for hybrid cloud environments.
So, at this point, there seems to be some conflicting information on whether Google is indeed planning to focus on this market.
But, to rewind a little further, back on August 30, NTNX issued downside guidance for 1Q19 in its fourth quarter report, which is what sparked this recent dive lower in the stock. Specifically, it guided for revenue of $295-$310 mln versus the $308.8 mln consensus, billings of $370-$390 mln, and EPS of ($0.28)-($0.26) versus the ($0.23) consensus.
The revenue and EPS guidance caused the disappointment, but it's important to note that one of the main reasons why NTNX didn't provide a stronger revenue outlook is because it is now expecting pass-through hardware revenue of 5-6% of billings, rather than its original expectation of 7%. Those familiar with NTNX will recall that the company is currently transitioning away from hardware in order to become more software-centric, with the goal of driving stronger margins and profitability. The lower hardware sales outlook negatively impacted revenue by $4-$8 mln and, consequently, negatively impacted earnings projections as well. To put this another way, NTNX's downside guidance may not be as week as feared as the transition to a software-centric model is progressing faster than it had expected.
Also on the positive side, on September 11 the company announced the largest deal in its history -- a deal worth more than $20 mln with an agency in the U.S. Dept. of Defense. The news provided a momentary pause in the weakness, but ultimately was not enough to reverse this downward trend the stock is mired in.
To conclude, NTNX has been taking multiple hits over the past few weeks, hitting shares to the tune of 30% since its Q4 earnings report. The dive has made shares more attractive from a valuation standpoint, now trading with a 1-year forward P/S of about 4.4x. For the time being, though, sentiment is clearly skewing on the bearish side and shares will first need to show signs of stabilizing before a traders can expect a meaningful rebound.