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Although these companies may not currently meet our investment criteria for reasons such as valuation, we keep a constant eye on them in case circumstances change and we decide to add them to one of our Trend Funds. These are our “companies to watch” and in our new series, we aim to provide a snapshot of these companies and why they should be of interest to our members and investors.
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Cloudera is a big data company backed by chip manufacturer, Intel (INTC US), which is seeking to raise up to US$210 million and list on the New York Stock Exchange by the end of April 2017. Founded in 2008, Cloudera designs software for managing data including storage, management, analysis and security. It uses a graphical interface, which allows users to easily monitor and analyse data. Its technology is based on an open-source program called Apache Hadoop, which manages large quantities of data by dividing it up into more manageable portions. While any company could theoretically use Hadoop for free, Cloudera helps manage it and sells proprietary software based on this open-source technology.
Discounted valuation but still not profitable
At the time of listing, Cloudera would be valued at US$1.8 billion – not bad considering it lost US$187.3 million in the last financial year and US$203.1 million in the year prior. It managed to grow sales by 57% to US$261 million in the last financial year.
Its valuation equates to a price to current sales multiple of 6.9x, expensive compared to already listed companies such as Tableau (DATA US) at 4.0x and Hortonworks (HDP US) at 3.0x but ‘reasonable compared to recently listed companies, Mulesoft (MULE US) at 15.8x and Alteryx (AYX US) at 10.5x.
What is even more interesting about Cloudera’s proposed valuation is that it is at a significant discount to its last round private funding in May 2014 when it was valued at US$4.1 billion. At the time, Intel invested over US$750 million into Cloudera but its 19.4% stake after the offering would only be worth less than US$350 million. Intel and other venture capital investors such as Accel Partners (14.4% interest post listing) and Greylock Partners (11.1% interest post listing) are not selling any of their shares in the IPO, according to the S1 prospectus.
So why the 56% discount?
Cloudera is facing growing competition and is particularly vulnerable using an open-source technology such as Hadoop, which is the technology used by Hortonworks. Since its listing in December 2014, Hortonworks has lost 37% of its value even though it also took a 34% discount to its private valuation when it listed.
Is it a buy?
The initial public offering (“IPO”) market is currently open for technology companies. After the successful listing of Snap (SNAP US) as well as software companies such as Okta, Mulesoft and Alteryx. All these companies are trading above their IPO price indicating that investors have been willing to accept high valuations at listing and push them into even loftier levels even though many of these companies are unlikely to be profitable for years to come.
We would not be surprised if Cloudera experiences a similar ‘honeymoon period’ after it lists but we have doubts about its long-term growth prospects amid rising competition and being exposed to an open-source technology. Further, with larger technology listings in the IPO pipeline such as cloud storage company, Dropbox and Peter Thiel’s data analysis company, Palantir Technologies, we would prefer to wait for these opportunities.
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