The Nuix Ltd [ASX:NXL] is undergoing a turbulent period right now. But what do its board and guidance issues mean for the NXL share price long term?
Down 25% this month.
Down 65% year to date.
Underperforming the ASX 200 by 85% over the last year.
Nuix is not having a stellar 2021.
Over the last few months, the data analytics firm suffered from a negative investigation into its board and IPO, as well as issuing a string of downgrades. Can it recover?
Downgrades and bad press
In May, Nuix issued its second downgrade in just over a month.
Nuix announced that it now expects pro forma revenue for FY21 to be $173–182 million, down from the $180–185 million declared on 21 April.
This was already down from the $193.5 million forecast in Nuix’s IPO prospectus.
This follows a joint investigation on Nuix published by The Sydney Morning Herald and The Australian Financial Review last month.
The investigation raised concerns over the company’s governance and financial accounts leading up to NXL’s float.
After acknowledging in its recent investor day that it was ‘listening to the feedback from our shareholders and the market’, Nuix probably hoped the worst was over.
However, the negative coverage from the media continued.
Yesterday, the Australian Financial Review reported today that Nuix has ‘gone to ground’ with a survey of investors revealing the software firm conducted ‘no one-to-one engagement since the first media revelations of governance and disclosure issues.’
The AFR reported that the lack of engagement received a mixed response:
‘Many investors expressed surprise that they had not heard a peep from the company, others labelled it “arrogant”, and some said they had not expected any direct interaction.’
NXL ASX outlook
Nuix is trading 70% down from its January high of $11.86. It is also down more than 45% from its issue price of $5.31.
Multiple questions arise when reflecting on Nuix’s recent turmoil.
Some of the most interesting are…
Should one quarantine NXL’s management issues from Nuix’s core product when evaluating the stock long term?
Should investors focus solely on the long-term commercial prospects of Nuix’s investigative data analytics product when evaluating the stock?
If one’s investment time horizon is 5–10 years, how should one weigh the current furore surrounding NXL’s board and governance?
It is interesting here to consider the investment style of Michael Burry.
In The Big Short, Michael Lewis profiled Burry and his ‘ick’ investments — stocks that inspire a first reaction of ‘ick’.
A great example in the book was US software company Avant! Corporation:
‘Avant! had been accused of stealing from a competitor the software code that was the whole foundation of Avant!’s business.
‘The company had $100 million in cash in the bank, was still generating $100 million a year of free cash flow — and had a market value of only $250 million!
‘Burry was able to see that even if the executives went to jail (as they did) and the fines were paid (as they were), Avant! would be worth a lot more than the market then assumed.’
Incidentally, this passage could also be relevant to Nearmap Ltd [ASX:NEA] and its upcoming legal battle with a rival over intellectual property infringement.
We covered the story here.
But back to Nuix.
One fund manager who continued to engage with the company after its float but who did not want to be named, told the AFR that:
‘Personally, I don’t see how the CEO and CFO [Stephen Doyle] can survive given how poorly this has been managed.’
But even if some senior NXL executives got the sack, would NXL be worth more than the market is currently assuming?
Morgan Stanley analyst Andrew McLeod seems to think so.
The analyst, who covers the NXL stock, remains ‘fundamentally positive’ on the company according to his most recent note.
Mr McLeod maintains an overweight rating on Nuix, with a price target of $6.40. However, he did reduce it from $7.50 last week.
More bearish investors may note that Nuix is operating with a market capitalisation of $872 million on negative statutory free cash flow in 1H FY21 of $1.21 million.
This compares to negative statutory free cash flow of exactly $1,000 in 1H FY20.
The company also posted a net loss after tax of $16.56 million in 1H FY21, down from a net profit of $14.48 million in 1H FY20. Nuix stated the 1H FY21 result was impacted by costs related to its float.
Nuix did end December 2020 with $128.24 million in cash and cash equivalents, largely thanks to $275.61 million raised from the issue of ordinary shares.
Likely, the biggest sticking point for bearish investors is NXL’s revenue visibility.
In its most recent forecast downgrade, Nuix admitted:
‘There remains uncertainty in relation to both the structure and timing of a small number of large customer upsell opportunities, including whether these may result in multi-year deals during FY21.’
This led CEO Rod Vawdrey to acknowledge a ‘near-term level of uncertainty regarding the precise timing, shape and scope of some large and anticipated customer contracts coming to fruition in the next few weeks.’
Whether you’re bullish on Nuix’s prospects or not, I think we can agree the company needs some good publicity.
Now, if you’re looking for stocks combining algorithms, data science, and AI, then I recommend reading the latest report on five promising AI stocks.
While Nuix may be grappling with a few problems, the wider industry is not.
For Money Morning
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