Cloudera: Cloudy For Now

Summary

• Cloudera plunged on weak FY19 revenue guidance.
• The cloud software company faces sales execution and focus issues that take time to remedy.
• Stock valuation turns intriguing, as similar examples in the general sector are positive for a long-term rally.

Cloudera (NYSE:CLDR) hits all the checkpoints for current technology buzzwords with a cloud platform-focused data analytics utilizing machine learning and artificial intelligence. The stock, though, has made the same moves as Tableau Software (DATA) that once benefited from the similar Big Data buzzword and eventually crashed as well. Investors should take some notes from their recovery path.

Source: Cloudera Twitter account

Expansion Rate Problems

Cloudera produced a strong end to FY18 but gave rather weak guidance for FY19, the biggest issue being the typical growing pains that take place in the sales organization as a software company matures. The stock ended down nearly 40% on the news, providing an interesting opportunity here.

The cloud software platform had an incredible net expansion rate of 136%, suggesting the vast majority of the 41% revenue growth rate for the year came from selling more software to existing customers. Revenue growth forecasts were cut to 20% for the current year due to reasons described by CEO Tom Reilly on the FQ4 earnings call:

Hopefully it gives you a little more color on that dynamic when I mentioned new customers kind of outside our target market we have probably expanded too much effort landing seem new customers that probably don't fit our long-term profile.

In essence, the sales team spent too much time at the end of the year landing customers without the global expansion abilities for the current year. The company even expects to churn out some of these customers.

One key issue Cloudera identified in the process is that customers need data scientists in order to utilize the software and expand services. Some industries are more advanced in hiring data scientists, and the company will focus on these sectors more this year.

Source: Business Broadway

The revelation provides an opportunity for the company to be more productive in the current year. A new focus on Global 8000 customers with an even higher quality than those in the past could help Cloudera enter FY20 with a higher expansion rate. The problem in the short term that makes the outlook cloudy is that the company is looking for a new leader for the global sales force, and until this person is in place, the results could be lumpy and volatile.

Tableau Example

As one learned about the sales force execution issue at Tableau Software, the stock took a long time for a sustainable recovery. An initial rally in 2016 was followed by a sell-off that left the stock at nearly the same level to start 2017.

The important part of the story is that Tableau went on a path of similar revenue growth of 40% like Cloudera to recently turning negative. The company hasn't solved the initial growth issues, but the stock still rallied off the lows big time.

In fact, the market only expects Tableau Software to grow revenues at a 10% rate going forward, yet the stock trades at a higher EV/S multiple now.

CLDR EV to Revenues (TTM) data by YCharts

Looking forward, Cloudera trades at an EV/S multiple of 3x FY20 sales estimates of $532 million. As one can see with Tableau, the stock market doesn't require much growth in these sectors to support a much higher multiple for Cloudera.

Takeaway

The key investor takeaway is that Cloudera faces a cloudy year. The company needs a new global sales force leader in place and some actual signs that sales focus is the issue for a sustainable rally. The stock though is incredibly cheap, requiring only limited growth for a rally beyond the current price of $14. Buy any dips from here, but expect a lengthy recovery process.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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