Over the past decade, growth stocks have been all the rage while value stocks have lagged. But remember, this isn’t normal. The last 10 years have seen an unprecedentedly long period of low rates and technological disruption, which has benefited high-growth stocks.
However, with the rollout of a vaccine and a new stimulus package signed, it’s entirely possible that value stocks, which trade at much lower multiples than growth stocks, and which disproportionately benefit from a strong economy, could outperform in the new year.
Here are three bargain-priced value names to put on your buy list in January.
In an age where many cloud software stocks trade at 20, 30, or even 40 times sales or higher, hyper-converged infrastructure software provider Nutanix (NASDAQ:NTNX) looks downright cheap at only 5 times sales. That’s especially true as Nutanix’s hyperconverged infrastructure products help companies run applications across multiple clouds, hybrid clouds, and on-prem data centers, a market that’s projected to grow at a 21% CAGR through 2023.
On the surface, Nutanix’s discount may seem warranted; last quarter, Nutanix’s revenue fell by 0.6%, with a $182 million operating loss in the third quarter alone. However, those numbers are deceptive. Nutanix is in the midst of switching its business model from a one-term software license to a recurring subscription model. When a company takes such an action, its revenue will come down or stagnate for a period of time, as annual revenue displaces multi-year revenue; in other words, Nutanix isn’t booking the entire amount of the license revenue that may occur over several years.
More telling is Nutanix’s annual contract value (ACV), and that figure surged 29% last quarter, more in-line with the company’s growth prospects in hybrid cloud management. Total customers grew 21%, and large customers that spend over $1 million per year grew by 29%. Gross margin also expanded by 180 basis points, seeming to validate the thesis that subscriptions lead to more efficient margins, and that one day Nutanix will make profits with enough scale.
Nutanix is also a fine company, with a customer-obsessed culture that leads to very low churn and a net promoter score of 90, which is extremely high. The company also won numerous awards in 2020, with both Gartner (NYSE:IT) and Forrester classifying Nutanix as the leading product in the HCI market, along with numerous awards for being an excellent partner and place to work in 2020.
Another reason the stock may be undervalued is that founder and former CEO Dheeraj Pandey stepped down as CEO in August for personal reasons. However, the company received a boost of confidence via a $750 million investment from private equity firm Bain Capital around that time. Just recently, Nutanix hired Rajiv Ramaswami, COO of rival VMware (NYSE:VMW) as its new leader.
Although it’s never great to see a terrific founder leave, Bain’s involvement, an experienced new CEO, and Nutanix’s cheap valuation amid a growing business makes it look like a very cheap stock heading into 2021.
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