Home / Investing 101 / As Nuix shares continue to tank, is now the time to buy?

As Nuix shares continue to tank, is now the time to buy?

Investing 101

Shares in software company Nuix Ltd (ASX: NXL) have slumped further today along with the broader information technology sector.

Nuix listed on the ASX last year at an offer price of $5.31 but rallied to highs of over $11 within the first month of trading.

Now, at $3.37 per share, Nuix’s market valuation has tumbled more than 63% since releasing its H1 FY21 results which didn’t meet the market’s expectations.

  • NXL share price

    Rask Media NXL 6-month share price chart

    Nuix background

    Nuix has developed software that’s able to extract insights and knowledge from unstructured data. Its technology has been used in some high profile investigations over the past several years.

    One notable investigation was the “Panama Papers”, where Nuix’s software was used to scan over 2.6 terabytes of scanned documents to extract metadata that helped journalists cross-reference people, places and other businesses.

    What’s been happening to the Nuix share price?

    Nuix’s shares started heading south when it released its H1 FY21 results in February, which revealed relatively modest growth despite its lofty market valuation.

    Revenue for the period came in at $85.3 million, down 4% yoy, which was only 44% of the FY21 forecast.

    Annualised contract revenue (ACV) was reported as $162 million, a 3% increase on the period year.

    Keep in mind that the company listed with a market capitalisation of $1.8 billion, with shares trading at around 9x projected revenue.

    High valuations aren’t necessarily a bad thing, but it implies that investors are expecting high growth rates moving forward. So, it’s fairly easy to see why its shares were sold down after reporting such modest growth figures.

    The sentiment around Nuix’s shares further deteriorated last month when management had to then downgrade its FY21 forecasts.

    Management noted that it was partly attributable to the company transitioning its customers from module-based subscriptions to a consumption-based model, resulting in a shift in both the revenue and ACV profile.

    What else?

    As my colleague, Raymond Jang pointed out in his article, Nuix’s listed on the ASX at a time where the market was assigning extremely high values to popular tech stocks.

    Today, the market is assigning much lower multiples to companies in the sector, so the broader thematic is, unfortunately, working against the Nuix share price at the moment.

    Nuix is on my watchlist for now, as I think there could be some more short-term pain as investors rotate out of the sector, which could put some more downward pressure on prices.

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