Nutanix stock drops as results trigger fear of ‘the cockroach theory’

Nutanix Inc. shares fell Tuesday after incomplete results and the disclosure of an investigation into reported costs led one analyst to voice concern about “the cockroach theory.”


reported preliminary second-quarter revenue of $486.5 million late Monday, but did not provide bottom-line results and said it would not file its quarterly report with the Securities and Exchange Commission on time because it was auditing its own numbers. The reason: Software had been used beyond the costs that had been accounted for, leading to an audit.

Management discovered “that certain evaluation software from one of its third-party providers was instead used for interoperability testing, validation and customer proofs of concept over a multiyear period,” and it was “likely that additional costs would be incurred to address the additional use of the software,” the company said, stressing it did not believe the matter would have a significant impact on fundamentals.

Raymond James analyst Simon Leopold, who has a market perform rating, said the delay “could trigger investor concerns.”

“We imagine restatements could affect cost of goods sold and/or operating expenditures, but not revenue,” Leopold said. “Typically, similar events trigger the cockroach theory in which investors see one problem and worry about the others that have yet to be revealed.”

Otherwise, the Raymond James analyst remarked that “Sales trends sound pretty good.”

Nutanix provides hyperconverged infrastructure, which essentially combines computer storage and servers in a hybrid-cloud product, allowing businesses to access on-site computing power as well as public-cloud assets. Executives’ forecast came in slightly above Street expectations amid a cloud software environment where most are reporting that deals are taking longer to close.

Read: Cloud software is a ‘fight for a knife in the mud,’ and Wall Street is souring on the one sector that was winning

Nutanix expects ACV billings of $220 million to $225 million on revenue of $430 million to $440 million for the third quarter, and ACV billings of $905 million to $915 million on revenue of $1.8 billion to $1.81 billion for the year.

JPMorgan analyst Pinjalim Bora, who has an overweight rating on the stock, agreed that the fundamentals were overshadowed by the audit, because the company could not “release its expense profile and detailed [profit and loss], balance sheet or cash flow statements for the quarter and didn’t provide any expense related guidance.”

“While we think this investigation might temporarily weigh on Nutanix shares in the near term, we don’t see it impacting the fundamentals of the business longer term,” Bora said. “We continue to think that Nutanix is in a position of strength today.”

Shares fell more than 9% to an intraday low of $26.10, while the S&P 500 index

dropped 1.7% and the tech-heavy Nasdaq Composite Index

slid 1.4%.

Of the 17 analysts who cover Nutanix, 10 have buy-grade ratings and seven have hold ratings, along with an average target price of $32.94.