Shares of Nutanix(NASDAQ: NTNX) tumbled on Thursday, following the company's announcement of third-quarter business results. The hybrid cloud-computing expert annihilated Wall Street's consensus-earnings target, but Q4 guidance came in below current expectations. Nutanix shares traded 22% lower at 3 p.m. ET.
Nutanix's results and guidance
In Q3, Nutanix's sales rose 17% year over year to $524.5 million. Adjusted earnings soared from $0.04 to $0.28 per diluted share. Your average analyst would have settled for earnings of approximately $0.16 per share on revenue near $517 million.
Looking ahead, Nutanix's management set the top end of their Q4 revenue guidance at $540 million, significantly short of the Street's $546 projection.
Many Nutanix investors wanted to see a completely flawless report -- the stock had gained 149% in the 52 weeks leading up to the Q3 update. Strong results with a side of disappointing revenue guidance weren't good enough, so Nutanix shares took an immediate haircut.
This price correction was probably overdue
The market reaction may look harsh, but I think it's actually a healthy move.
Even after the sharp price drop, Nutanix stock still isn't cheap. Shares are changing hands at 49 times adjusted earnings, which is a bit steep for a company with annualized revenue growth below 20%.
The company plays an active part in the artificial intelligence (AI) boom, signing AI partnerships and winning cloud-based AI systems management contracts left and right. But the lucrative AI deals take longer to close, since Nutanix is dealing with a larger and often more bureaucratic class of potential clients. Contracts under negotiation today may bring game-changing revenue streams in 2025 and beyond, without boosting Nutanix's near-term results.
So the stock could be a solid buy today, with the caveat that more price corrections could follow after the next couple of earnings reports. You might want to buy Nutanix stock in thirds, smoothing out the effects of unpredictable volatility.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends Nutanix. The Motley Fool has a disclosure policy.
