Cloudera: Incredibly Cheap After Sinking Further

Summary

• Cloudera has continued to fall after its post-earnings crash, breaking below $13 to all-time lows.
• The stock has lost 45% from its recent highs and is down 15% from its IPO one year ago.
• Cloudera's weak guidance will likely receive an explanation during the April 12 investor day.
• At just 3x forward revenues, Cloudera is one of the cheapest stocks in the cloud software sector.

Just when Cloudera (NYSE:CLDR) investors were probably thinking it couldn't get any worse, Cloudera has tumbled yet again - this time, to all-time lows below $13 per share. Pessimism for the company has never been higher - but despite the consensus doomsday opinion of the moment, I still believe Cloudera to have vast potential.

Coming right around the corner on April 28 is the one-year anniversary of Cloudera's IPO. Among the rush of software companies that went public in that March-April time frame - including Alteryx (AYX), Appian (APPN), and Yext (YEXT) - Cloudera is the only company to have posted negative returns. It's down 15% from its IPO price of $15. And some more context around Cloudera's new lows - its market cap is now $1.8 billion, less than half the $4.1 billion valuation at which Intel (INTC) bought an equity stake in the company.

Aside from a purely financial stake, Intel also has a strategic and technology partnership with Cloudera, consistent with Intel's initiatives to improve its position in machine learning and analytics - the mainstays of Cloudera's strength. The continued depression in Cloudera shares has some observers postulating that Intel would emerge to buy the rest of the company - at the moment, as of Cloudera's latest 10-K filing last week, Intel already owns 18% of the company. Certainly with $17.7 billion in cash as of the end of FY17, Intel has more than enough resources to pull off an acquisition.

I've been an investor in Cloudera since the early days after the IPO and have been frustrated by the stock's lackluster performance. I'm standing firm in my position, however, as I believe Cloudera to be a solid fundamental play at an incredible price. Not since the February 2016 crash of Tableau (DATA) has a cloud software stock seen such an accelerated selloff - and I'd argue that conditions at Tableau were much worse.

Cloudera has sagged on a potential disruption from a sales leadership shuffle - whereas Tableau saw an actual miss in results resulting from sales execution issues. The search for a new sales head to help guide Cloudera to the $1 billion revenue mark, even if it causes some near-term disruption, is certainly no reason to wipe half the value off Cloudera's stock. The lackluster FY19 guidance stemming from Cloudera's earnings, which I covered in a prior article, is more than likely to see upside revision.

I'd be a fool to say all is well with Cloudera - the near-term certainly has some risks baked in. Analysts are tripping over themselves to cut price targets, and investors are already selling off technology stocks in a risk-off market atmosphere. Despite the risk, however, Cloudera's extremely attractive price makes it an extremely compelling investment at this time.

Hadoop is a hugely growing technology that will increase in relevance as big data continues to be a top agenda item for enterprise C-suites. Without data management techniques like Hadoop, big data is rendered obsolete. And among the commercial Hadoop vendors, Cloudera is the largest and most established in a space that's already less crowded than most areas of software. Against the still-private MapR, Cloudera has the advantage of size, scale, and a blue-chip client roster; against Hortonworks (HDP), Cloudera has proprietary software wrapped around its open source Hadoop offering whereas Hortonworks sells just a support contract. There are virtually no mega-cap software vendors like Microsoft (MSFT) or Oracle (ORCL) with a competing Hadoop database offering, something you can't say about a more common space like CRM or ERP. There's almost no scenario to envision in which Cloudera doesn't continue growing toward profitability and scale.

Bullish catalyst in the near horizon: Investor Day on April 12

Marking the one-year anniversary of its IPO, Cloudera has invited analysts to its inaugural Investor Day, which will begin at 9am EST on April 12. Typical of these investor meetings is a large presentation with go-to-market updates, product announcements, and financial targets.

With Cloudera's FY19 guidance ($435-$445 million in revenues or +20% y/y at the midpoint, way below Wall Street consensus of $460 million) such a headlining topic for the investor community, there's a 99% chance that Cloudera's CEO and CFO will address the guidance issue in further detail.

Jim Frankola, Cloudera's CFO, will hopefully expound upon a point he made in answer to an analyst question on the Q&A portion of the earnings call: in formulating the guidance range for FY19, Frankola had pointed specifically to the fact that Cloudera had used the low end of its historical 120%-150% net expansion rate.

Cloudera's revenue growth comes principally from upselling existing clients - a bona fide "land and expand" company. Thus, the decision to use 120% versus 150% net expansion can have magnified effects on the implied revenue growth rate. Cloudera has achieved net expansion of ~135% in each of the past several quarters, including Q4 - so it's unlikely that the company will suddenly drop off to 120% in FY19.

Sure, the movement of a sales team and the departure of a few key account executives might have an impact - but will it drive customers en masse to stop upgrading their subscriptions? Unlikely. At well-staffed companies like Cloudera, multiple levels of account execs and their managers and their managers' managers are involved with every Tier 1 account. Removing one person in that layer doesn't destroy the relationship. New business and new deals might suffer from a temporarily shifting headcount, sure - but old business is safe.

With Investor Day likely to offer more information surrounding FY19 guidance assumptions and the coming sales force transition, Cloudera is highly likely to see a relief rally after the meeting.

Cheapest software stock in the market

Among cloud stocks that are currently growing double digits, Cloudera is now the bargain basement stock of the group - and it has committed no flagrant fouls to receive the short end of that stick. Recall two things about Cloudera's growth trajectory - first, even though the company is pointing to 20% y/y growth in the coming year, it grew by a stunning 42% in the most recent quarter; second, Cloudera has had a long history of beating every quarter's consensus expectations and its own guidance by at least 5%.

Here's a look at where some of Cloudera's comps are trading. Note that this is an assortment of some of the "cheapest" stocks in the software sector. This indicative group of comps each has a tangential relationship to Cloudera - Twilio (TWLO) and Box (BOX) have about the same revenue scale and growth rate; Yext went public around the same time as Cloudera and also never really took off; Hortonworks is Cloudera's next-largest rival in Hadoop; and Tableau was the last major enterprise software company to see a crash. Tableau has obviously since recovered (though not fully to its prior peak) and is now trading at nearly 6x forward revenues.

TWLO EV to Revenues (Forward) data by YCharts

Cloudera, with its current market cap at $1.84 billion and cash of $461 million, currently has an enterprise value of $1.38 billion. I'd stress again that it would be peanuts for Intel to swoop in and buy the remainder of Cloudera that it doesn't own, at a fraction of the price it previously paid on a per-share basis.

Against Cloudera's FY19 revenue target of $435-$445 billion (which, as I noted in the prior section, is hugely conservative), that's a valuation of just 3.13x EV/FY19 revenues - a full turn lower than Hortonworks, and many multiples below where the typical cloud software stock trades.

The only reason to be this pessimistic about a software stock is if it started showing negative y/y revenue comps, or burning cash at the rate of Blue Apron (APRN) such that a near-term bankruptcy is imminent, or was receiving Amazon AWS (AMZN) as its newest competitor. None of the above applies to Cloudera.

Final thoughts

Bitter as investors are over Cloudera's performance, the ups and downs are typical of high-growth software stocks, and part of the nature of investing in risky assets. I believe, however, that Cloudera's concerns are hugely overblown - and while it may take some time for the company to recover above the $20 mark that it achieved in March, the bullish thesis is fully intact for Cloudera. This is a fantastic opportunity to buy a flagship software brand in one of the key niche markets in big data technology.

I've opted to add shares and lower my average cost in response to the stock's huge correction. More to come as we learn more from Cloudera's upcoming investor presentation.

Analyst’s Disclosure: I am/we are long CLDR. 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.