Generation Investment Management: Nutanix ($NTNX) Investment Case
Introduction
Generation Investment Management highlights Nutanix as a key portfolio holding, illustrating the patient and long-term nature of their investment process. Nutanix, founded 15 years ago, developed hyper-converged infrastructure (HCI) for data centers.
Business Overview
- Provider of hyper-converged infrastructure (HCI) for data centers
- HCI combines computing power, data storage, and networking into a single offering
- Simplifies data center management for customers through a unified interface
Investment Thesis Generation’s investment thesis on Nutanix has three main components:
- Nutanix’s technology is expected to become the standard for running on-premises data centers
- The company offers the best solution for customers in a benign competitive environment
- Nutanix’s business model has become increasingly attractive over time
Market Position
- Leader in the HCI market with 50% market share
- Primary competitor is VMware with 40% market share
- Benefiting from the conservative nature of IT teams, which makes it difficult for newer, riskier firms to enter the market
Financial Performance
- Transition from negative free cash flow to sustainable positive free cash flow
- Since Generation’s initial investment:
- Revenues up 80%
- Gross profit up 100%
- Operating expenses up only 20%
Sustainability Impact Nutanix addresses two major bottlenecks in IT:
- People: Simplifies management of IT infrastructure, requiring fewer people with less training
- Power: Uses high levels of automation to reduce power consumption by 50% compared to traditional infrastructure
Competitive Landscape
- Primary competitor VMware was acquired by Broadcom in 2023
- Generation conducted a proprietary survey of VMware’s customer base, revealing:
- Widespread discontent among customers
- Concerns about price rises, deteriorating customer support, and slower innovation
- Nutanix is positioned to benefit from this situation, both for existing HCI users and those considering switching from legacy approaches
Management and Strategy
- New management team appointed in 2020, led by CEO Rajiv Ramaswami
- Team has more experience running large, complex software organizations
- Focus on operational improvements driving up margins
Risks and Challenges
- Initial difficulties in market adoption due to the newness of HCI technology
- Past strategic flip-flops, including transitions from hardware to software sales and then to a subscription-based model
Generation Investment Management views Nutanix as a compelling long-term investment, citing its strong market position, improving financial performance, and positive impact on sustainability through efficient IT infrastructure management. The firm sees potential for Nutanix to capitalize on market dynamics, particularly following Broadcom’s acquisition of VMware.
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