Cloudera is projected to be one of the most exciting tech IPOs of 2017 but some recent news yesterday started raising concerns about potential investors. Yesterday, Cloudera announced an initial price estimate for its IPO and the PPS(price per share) turned out to be less than half of recent financing rounds.
Cloudera is hoping to price its IPO between $12 to $4 per share which will value the company between $1.54 to $1.79 billion. The valuation increases a bit if we factor in options and restricted stock grants at which point Cloud could be worth $2 to $2.4 billion.
The reported numbers are certainly impressive but they represent a fraction of Cloudera’s valuation in previous financing rounds. Most notably, we can refer to Cloudera’s 2014 monster round on which Intel ended up investing $700 million at a $30.92 PPS. Currently, Intel owns about 22% of Cloudera and have been reportedly interested on buying up to 10% of the common stock to be issued during the IPO in order to keeps its stake in the company.
Cloudera’s valuation also falls short of some of the expectations of its mutual fund investors even after they marked down their investments to between $17 to $26 PPS. Mark ups/downs has been a common practice followed by public market investors such as hedge funds or mutual funds when investing in private companies.
The announcement has certainly raised some concerns within Cloudera’s potential investors but I thin there are a lot of factors that should be considered to formulate a thesis of Cloudera’s IPO price. Below I listed some of my own observations:
1 — Pricing Low is Smart: All these debated about Cloudera’s PPS is going to be completely irrelevant if the stock spikes in its first days of trading. Based on recent tech IPOS such as MuleSoft and Yext, it is very likely that, by pricing on the low end. Cloudera might be putting themselves in a position to outperform investor’s expectation on opening day.
2 — The Horton works Factor: Cloudera’s competitor Horton works has had a less than stellar run in public markets. That performance has to be influencing investor’s sentiment prior to the IPO.
3 — Heavy Competition Cloudera is the undisputed leader of the big data platform market but today is certainly experiencing a more intense competition than at the time of its previous financing. In addition to pur big data players such as MapR or Horton works, Cloud now competes with enterprise software incumbents such as Microsoft, Oracle, SAP, IBM, Amazon, Google, HP and more. Additionally, Cloudera is also challenged by innovating startups such as Databricks which are leading new trends in the big data market (Spark…).
4 — From Dominant Trend to Commodity: In 2014, big data was the hottest trend in the enterprise software space. In three years, big data has become more of an enabler to fast growing trend such as artificial intelligence(AI) or the internet of things(IOT).
5 — Slow to Enter the AI-ML Space: In my opinion, Cloudera hasn’t done a good job expanding beyond the big data infrastructure play and capitalizing on new trends such as AI or machine learning.
6 — Valuation Irrationality: Cloudera’s 2014 valuation has all the signs of being irrational: it was a mega-round($700 million), led by a single corporate investor(Intel) at a time of market exuberance(2014). Maybe a small correction will be healthy after all.