Nuix Rises From The Ashes

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After a post IPO car crash for investors, Nuix has turned the corner as it hits its AI straps and draws comparisons to US tech stock, Palantir.

-FY24 proved an earnings u-turn for Nuix
-Nuix NEO offers AI edge 
-Post marketing, momentum might take a breather
-Long-term bullish with near-term clouds

By Danielle Ecuyer

Nuix started listed life with a thud

Nuix (NXL) debuted on the ASX in December 2020 with high expectations, initially rising from its IPO price of $5.31 to $11 within a year.

Backed by Macquarie Group ((MQG)), which sold part of its stake for $565m, Nuix appeared to be the next big tech success story on the ASX. However, following a series of earnings downgrades, legal issues, and governance challenges, the stock plummeted to under $1 by mid-2022, representing around an -80% loss from the IPO price.

Problems, including an ASIC investigation and shareholder lawsuits over alleged misleading statements, deeply damaged the company’s and management’s reputation.

In June 2021, CEO Rod Vawdrey stepped down. Shortly after the CFO’s contract was terminated. New CEO Jonathan Rubinsztein took over in December 2021, beginning a strategic turnaround that aimed to reset the company’s focus and rebuild its culture.

By FY24, after three years of losses, Nuix returned to profitability. Investors took notice, especially following the company’s September investor day, which revealed a corporate transition to a more AI-focused model.

FY24 results signal a turnaround

Analysts now compare Nuix to US-based AI and data analytics company Palantir, which has seen significant success in the same field. In its FY24 results, Nuix posted a 20% revenue increase, 5% above Morgan Stanley’s forecast, with EBITDA growing by 39%.

Morgan Stanley praised the company’s turnaround, citing “credible” progress and posing the question, “Where to next?”

Nuix is known for its advanced data processing capabilities, especially in eDiscovery, where it processes unstructured data, emails, documents, multimedia, legal and investigative uses. Morgan Stanley draws parallels to Palantir, which offers similar capabilities in digital forensics and data analytics.

Traditionally, Nuix’s revenue has come from annual subscription licenses. The company recently introduced consumption contracts, generating income based on data processed, and a SaaS model.

NEO brings forth AI capabilities

The company’s latest innovation, Nuix Neo, is a subscription-based platform designed to handle advanced data analytics and investigations. It allows users to scale on demand, either on-premise or in the cloud. According to Morgan Stanley, Nuix Neo is helping the company “close the gap” with Palantir, as it transforms complex data into actionable insights.

Nuix’s stock has since experienced a significant re-rating, in part due to investor day presentations in Sydney, London, and Nashville that specifically focused on Nuix Neo and the company’s AI integration strategy.

Petra Capital suggests momentum may slow following these events. With the stock delivering a total shareholder return of 347% at $7.05 per share, the analyst anticipates a leveling-off in expectations and momentum. Note: the shares are now trading at $7.68.

At its August results, Nuix management projected 15% growth in annualised contract values for FY25. Neo already accounted for $12.1m in annual contract value from 23 licenses. Shaw and Partners noted recent share price gains were underpinned by Nuix Neo, an “AI-enriched data intelligence platform.”

Shaw expects a large portion of Nuix’s 1,000-plus enterprise customers to adopt Neo over the next five years, which could lead to increased revenue from the existing customer base and attract new clients.

Shaw believes Neo could be transformative for Nuix, with an incremental annualised customer value potential of $89m from existing clients and $37m from new clients by FY27.

The transition to Neo, with its advanced automation and AI integrations, is projected to increase average customer revenue by 2.3x times.

New Neo customers in FY24 spent $526k, compared to the current customer average of $186k. Shaw forecasts by FY29, Nuix’s revenue could exceed $500m, potentially doubling again by FY34, with EBITDA margins of 33% and free cash flow margins of 25%, on par with Palantir’s performance from FY21 to FY23.

Legal hurdles and broker ratings

Despite its progress, Nuix is still dealing with two legal challenges: an ASIC case related to continuous disclosure and a class action. Morgan Stanley suggests resolving these issues could relieve a negative “overhang” on the stock.

Several brokers are positive on Nuix’s potential.

Morgan Stanley and Shaw and Partners rate Nuix the equivalent of a  Buy rating, with target prices of $5.30 and $7.20, respectively. MST Access has a valuation of $5.51, while Petra Capital, which recently downgraded Nuix to Hold from Buy due to the stock’s re-rating, has a target of $6.73.

The company’s AGM is set for November 13, where further updates may provide additional insight into its trajectory.

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