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Nov 1, 2016

S3 BLACKLIGHT: Cloud Architect Nutanix’s Short Interest Nearing Full Capacity

Enterprise cloud platform designer and developer Nutanix Inc. (NTNX US) has had a roller coaster ride since its September 30th IPO with its stock price up 53% from its IPO price of $16.00, but down 45% from its year to date high of $44.46 which it hit two days after its IPO. At its present stock price of $24.42 it has a market cap of $3.4 billion, but a float of only 17.1 million shares.

Nutanix’s revenues have been growing every year since its 2009 inception, increasing from $241.4 million in 2015 to a projected $444.9 million in 2016 and projecting $702.8 million of revenues in 2017. EPS has reflected the continued increase of operating expenses for the growing company with a loss of $3.11 in 2015 and a loss of $3.83 in 2016. With revenues growing significantly and much of their costs frontloaded Nutanix expects their EPS loss to shrink to $1.41 in 2017.

As with all recently IPO’ed companies much of Nutanix’s stock is locked up for 180 days and not lendable immediately after the IPO. At this time, an estimated 20%-25% of Nutanix’s float is in stock lending programs. With a float of $423 million, the amount of lendable stock would be between $85-$105 million. With short interest at $81 million, there is approximately $4-$24 million worth of stock left to borrow. As we get closer to the lockup expiration, March 29, 2017, more stock will land in lendable institutional hands and availability will increase somewhat, but the major jump in availability will not occur until April 2017.

The cost to borrow Nutanix stock to support short sales is at 9.50% fee after hitting over 40% fee in early October when the first trickle of lendable shares hit the market. Although rates have been declining all month as lending inventory continually increased to offset short demand there will be very little offsetting increase in inventory in the near future. If short demand spikes we could quickly see early October’s 40% levels return.

With analysts giving Nutanix a mid $30’s price target long shareholders have a rosy view of future returns, but with VMware (VMW US) and Cisco (CSCO US) pushing competing infrastructure products and Amazon (AMZN US), Google (GOOG US), Apple (AAPL US) and IBM (IBM US) pushing simple cloud computing solutions the road to profitability may be longer, rougher and more crowded than anticipated. In addition to external competition, there may be internal corporate roadblocks that Nutanix will have to overcome. The complexity and expense for buyers to reconfigure their entire I.T. infrastructure in order to use Nutanix’s products, the costs sunk into legacy products and the encroachment into an existing I.T. staff’s domain are hurdles that need to be cleared in order for Nutanix to maintain its recent 20% revenue growth rate.

With short sellers in a temporary holding pattern until more stock becomes available to borrow, longs will be controlling the direction of NTNX’s share price – up if they continue buying towards analyst’s target prices, down if they begin selling to lock in post-IPO profits.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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