[Cloudera] HortonWorks Stock Forecast

Cloudera HortonWorks Stock Forecast:Applications for smart machines are virtually unlimited, and there have already been significant strides in fields ranging from cybersecurity to manufacturing. The foundation of true artificial intelligence is a machine’s ability to learn. With enough data, AI can be taught to make smart decisions using a decision-making process comparable to the process used by people.

Data software company Hortonworks was founded in 2011 to develop and support software capable of managing the massive amounts of data required for these technological advances.

The HortonWorks/Cloudera Merger

In January 2019, Hortonworks merged with cloud data analytics expert Cloudera in an effort to maximize efficiencies, make the most of combined resources, and increase revenue.

A week after the merger was complete, the CEO of the combined company released a statement sharing the benefits of bringing Hortonworks and Cloudera together.

He pointed out that the new Cloudera was in a strong financial position, with approximately $500 million in cash, no debt, and revenues of nearly $1 billion. Perhaps more important, the new Cloudera boasted a client list of more than 2,000 of the world’s leading enterprises.

The combined company’s large scale and massive market presence promised to position it as an industry leader. In fact, the expectation was that Cloudera would set the industry standards for data management.

Today, investors are wondering if the merger has delivered on the promised benefits and whether the combined Hortonworks/Cloudera stock is a buy.

What Does HortonWorks/Cloudera Do?

Cloudera has been around slightly longer than Hortonworks. It was founded in 2008 by three engineers from technology giants Google, Yahoo!, and Facebook, along with a former Oracle executive. When it was launched, Cloudera focused on open-source Apache Hadoop distribution, and it focused on deploying the related technology in various enterprises.

Combined, the new Hortonworks/Cloudera offers something unique: a position as the only next-generation data management company to run across all major public cloud infrastructure. This includes Azure, AWS, Google, IBM, and Oracle.

The two companies had invested heavily in different but complementary technologies, including real-time streaming at the edge, enterprise-grade cloud-native data warehouse, machine learning, and the industrialization of artificial intelligence. Combining the companies brought a complete technology package to clients, delivered in what is considered the industry’s first enterprise data cloud.

In short, Cloudera offers clients an opportunity to maximize data collection and analysis anytime, anywhere. But has the combined company delivered on its promises to investors?

HortonWorks/Cloudera: Post-Merger

In a nutshell, the post-merger financial news has been all bad. After the fourth quarter earnings report was released, share prices dropped by 20 percent.

Where analysts were expecting revenues of approximately $209.2 million, the company only reached $144.5 million.

More alarming, Cloudera had projected revenues of $965 million for fiscal 2020 in pre-merger documents. That was revised to $835 million to $855 million of revenue for the fiscal year. Operating cash flow came in at negative four percent, which was of particular concern for many investors.

At the time, a deeper dive into the issues showed that the company’s future might not be as grim as it appeared, and some analysts said the price drop offered an opportunity to buy at bargain prices. For example, some of the revenue forecasts were revised due to changes in accounting post-merger.

Cloudera leaders also noted that the merger caused some disruption to sales, which was expected to last no more than two quarters. Chief Financial Officer Jim Frankola said:

“So the revenue dis-synergies are associated with the act of putting together two companies. So you are merging two fields. You are implementing new processes. You are implementing new systems. It takes time to do all that, and that’s time that is taken away from the normal management of the business.”

Some analysts believed investors should look at other factors when making an investment decision, such as the fact that the combined company grew ARR 24 percent in fiscal year 2019.

At the time of the fourth quarter earnings call, that figure was expected to drop slightly for fiscal year 2020, falling between 18 percent and 21 percent.

However, business leaders said they expected a rebound in the range of 20 percent to 25 percent for fiscal year 2021. They also projected operating cash flow of closer to 10 percent – a dramatic improvement over 2019’s negative four percent.

Unfortunately, the earnings call for first quarter wasn’t any better, and the company announced the departure of CEO Tom Reilly, who oversaw the merger. In fact, reaction to the call was so bad that shares dropped by 30 percent overnight.

Executives explained that an unexpectedly large number of clients postponed renewal and expansion of their agreements, bringing the company’s revenue guidance down further to between $745 million and $765 million.

Of greater concern, the ARR growth that was already below expectations at between 18 percent and 21 percent was revised downward again – to between 0% and 10% for the full year.

Is Cloudera a Buy?

Cloudera has new products in development, any one of which could transform the company’s prospects, but the bottom line is that buying Cloudera now is risky.

The company has a lot of potential, but it is anyone’s guess as to whether that potential will materialize into revenue.

However, investors with confidence in Cloudera can get shares at bargain prices in today’s market, which means more room for growth if the company delivers on its promises.