The bond market’s wild gyrations were once again front of mind for traders last week, though interestingly by week’s end the market was mostly mixed as the S&P 500 lost 0.75%, the Dow fell 1.34%, and the Nasdaq was virtually unchanged.
The Stock – Nutanix (NTNX)
Why the Strength
Nutanix’s various offerings and the sector itself (hyperconverged infrastructure) can give you the proverbial ice cream headache, as most sound like they’ve been named by engineers. But the underlying story is easier to understand and has big potential: The firm has a platform that powers all of a client’s IT equipment and can power just about any type of deployment, including all apps, workloads, databases and programs (AI, machine learning, etc.)—and, importantly, it allows them to run and move between all of the different cloud environments out there, so everything can run where it operates best and at a much lower cost. (Nutanix estimates total costs are 40% less over five years than the standard way of doing things.)
All of that bodes well for the underlying business, and thanks to the firm’s transition to a subscription business model—which has taken a few years—costs are falling (especially for renewal efforts), retention rates are elevated (north of 90%) and recurring revenue (up 30% in the latest quarter) are surging. And that means free cash flow is set to pick up in a big way: For fiscal 2024 (which just started in August), Nutanix sees about $1 per share of free cash flow, and last week, management released some long-term projections, with recurring revenue expected to double in the next five years while free cash flow grows four-fold.
It’s worth noting that the top brass’ big-picture projections from two years ago were easily topped, which is a good sign that even these projections could be low. Overall, Nutanix looks to be in the right place (a key tech and AI infrastructure player) at the right time (when its business model transition is bearing fruit).
Technical Analysis
When we wrote about NTNX a month ago, the stock had just broken out from a nine-month rest period, including some very tight action the prior 12 weeks. Since then, the stock has done nothing—which we view as very encouraging given the market environment. Indeed, NTNX has chopped around with some big daily swings around its recent Investor Day, but has held its 25-day line. Stop — 30
The Covered Call Trade
Buy Nutanix (NTNX) Stock at 35, Sell to Open November 35 Strike Calls (exp. 11/17) for $1.50, or a Net Price of 33.5 or less
Static Return: $150 per covered call (4.47%)
Breakeven: 33.5
Covered Call Return (if assigned): $150 per covered call (4.47%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 33.5 or less. (In this case 35 minus 1.50 = 33.5. Or another example is you could pay 34.5 for the stock and sell the call for 1, which also equals 33.5)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on October 10, 2023.
