Cloud businesses are booming. Like many of the software and data companies we have profiled previously for GuruFocus, Cloudera (CLDR, Financial) offers a suite of integrated products aimed at covering all or most of its customers data needs. From its HQ in Silicon Valley, Cloudera has built a diverse product suite that gives customers the ability to utilize their data to the greatest possible extent. Cloudera’s Data Hub, Cloud Analytics, and a host of science and engineering offerings make up its product set.
Cloudera’s story is still in its public infancy. Founded in 2008 and taken public just last year, Cloudera has yet to make a profit and continues to spend large sums on research, development and marketing. Despite its nascent condition, Cloudera represents a compelling opportunity for aggressive investors with an appetite for high growth at reasonable risk.
The financial story so far
Cloudera’s financial story is one that is very much still being written. First, it has yet to post positive earnings. Second, we have less than a year’s worth of publicly disclosed filings to work from. Cloudera has just recently entered this new, public, expansionist phase.
Revenue has grown every quarter over quarter, including from before the company’s initial public offering. Reported revenue for 2016 hit $166 million. That jumped an impressive 57% to $261 million in 2017. Provided it can sustain such a high pace of growth, it is not beyond the pale to think that Cloudera could hit $1 billion in revenue within a few years. Gross income did even better, jumping 93% from $89 million in 2016 to $172 million in 2017.
So, where’s the loss? Cost of goods sold aren’t outrageous at $89 million in 2017 (not a terribly significant increase from $77 million in 2016, especially considering how much revenue grew – this is encouraging). However, SG&A costs have ballooned, from $294 million in 2016 to $360 million. While SG&A cost growth (only 22% growth last year) is not outpacing revenue growth, the high costs are keeping Cloudera from currently turning a profit. Net income is currently a loss of $187 million, and Ebitda is running at a loss of $177 million. In order for Cloudera’s stock to make the gains its investors hope for, it needs to turn those losses into profit. Investors have some patience, acknowledging that these losses are necessary to fuel rapid growth and scale, but the company will need to tip into the black within two to three years if it hopes to keep that glow of positivity intact.
Finally, using our favorite statistic, earnings surprise, provides a similarly negative-but-could-turn-positive story. Over the last four quarters, Cloudera has averaged a positive earnings surprise of approximately 30%. We shall see if this trend continues.
The case for Cloudera
We see three factors working in Cloudera’s favor that make its growth story compelling from an investor’s perspective:
- Significant revenue growth in variety of streams from new and existing customers. If Cloudera can continue to reach 50% yearly growth rates for revenue, and keep costs from ballooning beyond, say, 30%, then profitability is in its future. Cloudera’s goal should be to dramatically ramp up its sales from both existing and new clients.
- Increased member usage and new member contracts. Cloudera’s major focus is on large private sector and government entities, namely the top few thousand that have a use for its substantial product suite. If Cloudera can encourage its current members to buy more of its products and use a wider array, this will be positive. Further, the company needs to take a strong focus on new member contracts, particularly from the very large enterprises that can help generate significant levels of revenue. With continued focus on perfecting its offerings and offering superior, personalized customer support, Cloudera should be, as they say, in business.
- Future opportunities in Cloud tech. We see substantial future opportunities in Cloud technology. Some we can envision already, but we also acknowledge that many opportunities likely exist that are as yet completely unexplored. Cloudera is currently a relatively small, lean company, which could give it an edge over some of the massive, ponderous legacy tech giants.
The threats to Cloudera
As with any investment thesis, we must also consider the negative factors and downside risks. In the case of Cloudera, there are three specific areas of concern worth mentioning briefly:
- Financial performance may not deliver. If Cloudera continues to burn through cash to build revenue growth, but fails to tip earnings into the black, it will cause major problems for the bull thesis. Many companies grow revenues rapidly but have difficulty converting that into sustained earnings growth. Such has been the case for many software companies, and it represents a risk investors must consider when weighing the pros and cons of investing in Cloudera.
- A general market downturn could cause problems. Anyone following tech stocks will be familiar with the recent negativity weighing on the sector. Fears of a general market downturn, trade disputes and an overheated tech stock sector have made investors skittish. Cloudera could get pulled down by a market rout in the short run, and could also suffer operationally if client companies are forced to scale back their investments in data technology in order to cope with a troubled economic or financial environment.
- Competition within the Cloud market could crimp growth. Many software and data companies, big and small, have been pouring into the Cloud space in recent years. While Cloudera has a distinctive set of offerings, it is still facing off against many legacy tech companies with enormous reach and financial firepower. That is always a threat that must be factored into our investment thesis.
Verdict
We view Cloudera as a compelling long-term buy that could pay high rewards as it matures and carves out a sustainable niche in the Cloud. However, it is not a stock for the faint of heart or risk-averse. It is definitely not a Ben Graham-style value play. It has more in common with a high-quality Phil Fisher growth stock.
Is this a sure bet? No. But Cloudera offers major opportunities for growth, both materially and in terms of its stock valuation. Balancing risk and reward, Cloudera looks like a good play for investors with a taste for high growth at moderate risk.
Disclosure: I/We own none of the stocks discussed in the article.
(This article was co-authored by Clyde Wm. Engle Jr., whose research and insights helped inform the article's thesis. Engle is an investment analyst with Almington Capital.)
