By: Trefis Team, Trefis
Google’s parent company, has been focusing its efforts on growing its cloud offerings over recent years. While the technology giant has done well to become the third-largest player in the rapidly-growing segment, we believe that the company should explore strategic acquisition opportunities to cement its position. In our opinion, a strong acquisition candidate is Nutanix. Trefis highlights the reasons why Google should acquire Nutanix in an interactive dashboard along with our estimate for a potential acquisition price. We highlight key takeaways from our dashboard below.
Trefis estimates Google’s valuation to be $1,286 per share, which is roughly 10% ahead of the current market price.
Why Should Google Acquire Nutanix?
Hybrid Cloud Is Key
- Most large public cloud players have established dedicated relationships with leading hybrid cloud providers (with strong on-premise presence) or have acquired them.
- Amazon and Microsoft have preferred relationships for AWS and Azure, respectively with VMware.
- IBM had acquired Red Hat to further IBM’s cloud.
- Microsoft also has relationships with IBM and Red Hat for Azure. Microsoft and Oracle had also recently tied-up to make their clouds interoperable – Oracle has a large on-premise presence due to its database workloads.
- Google released its own hybrid cloud platform (called Anthos) in April, but the company needs an established player in the data center market to fulfill its goal of reaching out to the private clouds
- Although Google’s management does not disclose numbers around Google cloud, the company has pointed out that cloud as an area of investment commands a lion’s share of its outlay. The company also hired a new CEO for its Cloud business (ex-Oracle executive, Thomas Kurian),
- We think Nutanix could fit in well with Google’s hybrid cloud strategy. Nutanix is the leader in the hyper converged infrastructure (single appliance modules that enable building virtualization in data centers).People Lined Up
- Key catalysts to a potential deal could be the fact that Sunil Potti, Nutanix’s Chief Product Officer is now with Google, and Brian Stevens, VP and CTO of Google Cloud is now on Nutanix’s board.
Google-Nutanix Could Scratch Each Other’s Itch
- A potential acquisition could also benefit Nutanix, as the company has been witnessing sales slowdown due to salesforce-related issues and a transition to a subscription model. Although the company’s most recent results beat estimates, the management admitted that there is more room for improvement.
- Before Thomas Kurian was brought in, Google’s cloud business was known to be facing difficulty in selling to enterprises despite the company’s superior technology. Nutanix could also potentially benefit from the cumulative learnings – leading to assimilation of technological prowess.
The cumulative impact of heightened hybrid technology and coupled with experience sales personnel could lead to an improvement in sales for the combined cloud sales for the two companies.
Valuing The Combined Entity, And Determining Acquisition Price
- Google’s cloud revenue (est): 2018 – $6.5 bn; 2020 (forecast) – $18.2 bn
- Nutanix’s cloud revenue (calendarized): 2018 – $1.2 bn; 2020 (forecast) – $1.6 bn.
- Applying a 4x price-to-sales (P/S) multiple to Nutanix’s 2020 revenues, we estimate the fair value of the company to be $6.3 bn (roughly 50% higher than its current market cap of $4.25 bn)
- At a 15% revenue synergy on the combined revenues, the combined entity could see revenue synergy of $3 bn.
- Applying a 5x P/S multiple to revenue synergies, we value the synergies at $15 bn.
- The higher multiple on the synergies vs Nutanix is due to the incremental growth leverage that Google will bring to the table.
- Assuming a 20% share of total synergies to Nutanix, the company’s acquisition premium comes to $3 bn.
- Considering the intrinsic value of Nutanix at $6.3 bn and $3 bn from synergies, the potential acquisition price for Google would come to $9.3 bn – almost double its current market cap.