Cloudera Stock Prediction: Buy or Sell?

The first quarter of 2019 has been a shaky one for Cloudera [NYSE: CLDR] stock. Shares fell by more than 10% in mid-March after the company disclosed disappointing results in Q4 2018. But is this just a taste of things to come for Cloudera, or are shares poised for a rebound?

Cloudera: Company Overview

Headquartered in Palo Alto, California and founded in 2008, Cloudera is a software company that provides cloud computing services to enterprise customers.

“Cloud computing” is a term for computing services such as storage and software that are provided to users remotely via the Internet, instead of running on the user’s own hardware.

Specifically, Cloudera [NYSE: CLDR] offers an “enterprise data cloud” with machine learning and analytics capabilities that help customers improve their efficiency and productivity through the power of big data.

Cloudera’s CEO is Thomas J. Reilly, who has headed the company since July 2013. The main competitors of Cloudera include other providers of cloud data management solutions such as IBM [NYSE: IBM], Oracle [NYSE: ORCL], Microsoft [NASDAQ: MSFT], and Amazon [NASDAQ: AMZN].

The Pros and Cons of Buying Cloud Computing Stocks

Cloud computing stocks like Cloudera are attractive because they often feature:

Large Customer Base

According to RightScale’s 2018 State of the Cloud survey, 96 percent of companies now use the cloud in some form or fashion.

Research and advisory firm Gartner projects that worldwide public cloud revenues will grow by 17 percent in 2019.

Recurring Revenues

Unlike one-time software purchases, cloud computing services require monthly contracts usually. These ongoing payments from customers produce predictable, recurring revenues.

As the customer base grows ever larger the stability of the revenue stream becomes ever more attractive to investors.

High Friction to Leave

Once customers adopt a cloud software solution, the hurdle to leaving and selecting another provider becomes increasingly high.

Employees need to be re-trained on a new platform if management decides to switch and often those switching costs are too high to justify a transition.

But it’s not all a rosy picture. The drawbacks of buying cloud computing stocks include:

Intense competition

The downside of a hot industry like cloud computing is that there’s a bit of a “gold rush” right now, as new companies flood the market with fresh ideas.

Established players need to keep innovating, or they risk losing market share.

Long B2B Sales Cycle

To convince a customer to adopt a cloud solution can take a significant amount of time. That lengthy sales cycle comes at a cost because it generally requires lots of investment to sales teams.

Is Cloudera Stock a Buy?

The cloud computing industry might be set for growth in the near future, but Cloudera is a different story. Since the company’s IPO in April 2017, when shares opened at $18.10, Cloudera stock has been on a volatile yet clear downward trend.

In October 2018, Cloudera [ticker symbol: CLDR] announced a $5.2 billion merger with its nearest competitor Hortonworks, and the transaction was finalized in January 2019.

However, the company has revealed that it expects “dis-synergies” from the merger in the coming year, subtracting $52 million from its annual revenue. As a result, Cloudera has estimated a Q1 2019 loss of 25 to 36 cents per share.

What’s more, the company has been in a slump lately. Between March 2018 and March 2019, Cloudera shares have declined 27%, at a time when the S&P 500 showed modest returns of 1%.

Despite this temporary bad news, Cloudera [NYSE: CLDR] is still optimistic about where it’s going in the future. Cloudera executives project that the company is on track to reach $1 billion in revenue in calendar year 2020, as well as a 10% operating cash flow margin.

Cloudera Stock Prediction: The Bottom Line

Given its poor returns for Q4 2018, Cloudera is a highly fraught stock right now. The company will be under pressure to prove that its merger with Hortonworks is capable of generating real value.

The good news is that Cloudera currently has a price-to-sales ratio of roughly 3.5, which is relatively inexpensive for a company of its size and industry.

What’s more, the company plans to release its new Cloudera Data Platform (CDP) later this year. The most visible result of the merger with Hortonworks, CDP will be a public cloud service allowing customers to extend their data center deployments to a cloud offering such as Amazon Web Services or Microsoft Azure.

In addition, CEO Reilly believes that Cloudera will gain other indirect benefits from the Hortonworks merger. Thanks to acquiring Cloudera’s biggest competitor, Reilly predicts that the company won’t need to discount its prices as aggressively in order to remain competitive.

Although the advantages of the Hortonworks deal could be significant for Cloudera, they still remain only speculation. Investors eyeing Cloudera shares must be comfortable with the fact that the stock has been on a serious downward trend lately, falling almost 50 percent since its high in October 2018.

Due to the high degree of risk, and the fact that there are better-performing tech stocks on the market, this stock may be worth watching for the time being. Only time will tell whether the merger will be able to send Cloudera stock in the right direction.