- While the recent Intel and Cloudera announcement was applauded by analysts, the market took it with a yawn.
- Intel will benefit, however probably not by much, that will make a big difference in Intel's profits.
- While the sector has room to grow, there is already a lot of competition in the space.
In general, analysts applauded the deal, saying this was something badly needed by Intel, since their own version of the Hadoop distribution did not fare that well in western markets, but is nevertheless popular in China and India.
The idea behind Intel's investment is that 82% of enterprise customers say they believe big data analytics would be useful in making business decisions, but only 6% of enterprises actually use big data analytics.
In addition, Cloudera will optimize the Hadoop distribution for the Intel ecosystem (chips and technology) that should make for a more competitive offering, helping both Intel and Cloudera in the space.
However, while the move is in the right direction and it will definitely help both companies gain market share in the space, I don't think it will help Intel much in terms of earnings.
First of all, while Intel will now be Cloudera's biggest shareholder, it will not be a majority shareholder, and therefore Intel will not be able to consolidate Cloudera's balance sheet and profits (if any). Intel announced it has invested $740ml in Cloudera, giving it an 18% stake in the company. Even if Cloudera is very successful, Intel will not get much of that success. Also, I dare to question Cloudera's valuation and if Intel will ever make any capital gains from its investment.
Intel has over 90% penetration and market share of data center server market. In fact in the conference call the Cloudera executive said when looking at Cloudera's install base, Intel's market share is closer to 100%.
So in other words, when you have such a huge percent of the market, you can't expect to sell more chips. When you have near 100% of the space, there is not much more to build on from there. Even if Intel sells more high-end Xeon server processors, it will not amount to much.
And while Cloudera will benefit selling services and products around big data solutions, Intel would not get much of that revenue. I do agree, however, that Intel's OEM partners will help in promoting Intel's products that will work with Cloudera's Hadoop distribution. However, it remains to be seen if the revenue from this partnership will be enough to make a dent in Intel's revenue and profit picture.
In addition, Cloudera is not the only big data company out there. IBM (NYSE:IBM) and Pivotal also offer their own Hadoop distribution, along with a complete line of software and services. While Hortonworks - a Yahoo (NASDAQ:YHOO) spin-off - has raised nearly $200 million in total and has a tight partnership with Red Hat (NYSE:RHT) and Microsoft (NASDAQ:MSFT), among others.
As for the price action in Intel's stock, the market took the Cloudera deal with a yawn. Having said this, however, the truth of the matter is that Intel does not need Cloudera for its stock to rise. Intel is cheap enough and could rise by itself with no news whatsoever. With a P/E of 14 and a forward dividend of around 3.5%, Intel is one of the cheapest technology stocks out there.