Two important questions to ask before you buy Nutanix, Inc. (NASDAQ:NTNX) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, NTNX is currently valued at US$9.3b. I’ve analysed below, the health and outlook of NTNX’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
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What is Nutanix’s cash yield?
Nutanix generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
The two ways to assess whether Nutanix’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Along with a positive operating cash flow, Nutanix also generates a positive free cash flow. However, the yield of 0.74% is not sufficient to compensate for the level of risk investors are taking on. This is because Nutanix’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Nutanix’s yield sustainable?
Can NTNX improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, NTNX’s operating cash flows is expected to more than double from the current level of US$132m, which is highly optimistic, so long as capital expenditure doesn’t ramp up by even more. Furthermore, breaking down growth into a year-on-year basis, NTNX is expected to be able to increase its growth rate each year for the next three years.
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Nutanix relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Nutanix to get a better picture of the company by looking at:
Valuation: What is NTNX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether NTNX is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Nutanix’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.