Why Nutanix rose 25.1% in August

Actions of the hybrid cloud software provider Nutanix (NTNX -4.36%) rose 25.1% in August, according to data from S&P Global Market Intelligence.

Nutanix’s fourth-quarter earnings report on Aug. 28 beat analysts’ estimates and also provided solid guidance for the year ahead.

A bang and grow with healthy free cash flow

In the quarter, Nutanix grew revenue 11% to $548 million, while posting adjusted (non-GAAP) earnings per share of $0.27, both numbers coming in ahead of analysts’ estimates. The company also estimated revenue of $570 million for the first quarter at midpoint, showing good sequential growth and from $2.345 billion to $2.465 billion for the year ahead. Forward annual guidance points to an 11.7% growth rate in the middle of the year just completed, so the acceleration from the fourth quarter’s growth rate likely encouraged investors.

Of note, the company’s annual recurring revenue (ARR) increased by 22%. And free cash flow showed a big acceleration in the quarter to $224.3 million, up from just $45.5 million in the year-ago quarter.

Encouragingly, CEO Rajiv Ramaswami said the company saw the highest number of “new sigs,” or new customer acquisitions, than the company has seen in three years. That may be because Nutanix’s hyperconverged software is up against VMware, which was acquired last year by Broadcom (AVGO -10.36%). Broadcom has focused more on larger companies since the acquisition and raised prices, which appears to have opened up small and mid-sized business opportunities for Nutanix. That said, Nutanix also noted some big customer wins.

Nutanix is ​​reasonably priced for an AI software stock

Nutanix isn’t an outright artificial intelligence (AI) stock, but it should benefit from the AI ​​trend as its software helps companies manage their hybrid cloud offerings by unifying data between the cloud and on-premises data centers. It’s very likely that many companies will want more of this as they manage AI training in the cloud, but also try to protect their data and run inference workloads on-premises. At 6.9 times trailing sales and 24.8 times trailing free cash flow, Nutanix looks reasonably priced, especially in the software world where valuations tend to be higher.