Investors In Nutanix Inc (NASDAQ:NTNX) Are Paying Above The Intrinsic Value
How far off is Nutanix Inc (NASDAQ:NTNX) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in January 2018 so be sure check the latest calculation for Nutanix here.
Is NTNX fairly valued?
I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off, I use the analyst consensus forecast of NTNX’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 11.28%. This resulted in a present value of 5-year cash flow of $751.0M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
In the visual above, we see how how NTNX’s top and bottom lines are expected to move in the future, which should give you an idea of NTNX’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of $3,385.6M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $4,136.6M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $25.79, which, compared to the current share price of $37.49, we see that Nutanix is rather overvalued at the time of writing.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For NTNX, I’ve compiled three important factors you should further research:
1. Financial Health: Does NTNX have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does NTNX’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of NTNX? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass 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.
