Should You Invest in Cloudera IPO?

Cloudera-IPOCloudera IPO Shows Renewed Optimism

Do you know why tech startups spent the last three years avoiding the public market? It’s because the market was on tenterhooks. Investors were so tense that any hiccup came with a massive drop in the stock price. But that pessimism is coming to an end. Just look at the Cloudera IPO and, more importantly, the Cloudera IPO date—it’s positioned for 2017. Don’t you see what the Cloudera IPO in 2017 means?

It means the IPO market is coming back to life. After three years on the down slope, startups are making the transition to public life in greater numbers. It’s about time.

Take note: there were more than two dozen IPOs in the first quarter of 2017.

Now, that doesn’t erase all the questions about the Cloudera IPO valuation, like why it’s lower than expected, but it does give us hope—hope that the IPO market isn’t dead after all.

Investors should be excited! The number of IPOs tripled between 2016 and 2017.

Even better, the average amount of money raised was 375% higher than a year ago.

Just look at the numbers:

IPO BULL MARKET

Q1 – 2016 Q1 – 2017
Number of IPOs 8 25
Funds Raised $667M $9.9B

It’s obvious that market sentiment has shifted.

Investors are willing to take a chance on young companies again, which in turn makes startup founders confident about going public. It’s a virtuous cycle that can help everyone get rich.

But why now? What changed in order to make the Cloudera IPO possible?

I think it was the IPO of Snap Inc (NYSE:SNAP). That IPO cleared the way for a whole generation of startups to go public, including Cloudera.

How the Snap IPO Changed Everything

It was a big deal that Snapchat’s parent company went public this year. Snap raised a huge amount of money, more than any U.S.-listed IPO in the last three years.

The last IPO on that scale was Alibaba Group Holding Ltd (NYSE:BABA).

It doesn’t matter whether you think Snap stock is garbage. It doesn’t even matter if you think SNAP is the next Facebook, Inc. (NASDAQ:FB) stock. I’m not here to debate whether or not Snapchat is a good investment.

My point is simply that market sentiment inverted because of the Snap IPO. We went from a bear market for IPOs to a bull market in a matter of months. That’s the point.

Cloudera is a different company in a different line of business than Snap.

What binds them together is the process of going public.

Imagine you’re running a tech startup in Silicon Valley. You built this company with your bare hands. Over a handful of years, you raise millions of dollars, grow your revenues, and hire dozens of staffers.

Now you carry those jobs on your shoulders. By and by, your business keeps growing till you feel like a big change is necessary. Perhaps you should go public. But the IPO market is bone dry.

Every investment banker you talk to says the same thing: “This isn’t the right time.”

Of course you listen to them.

It’s their job to keep an “ear to the streets,” and what they’re hearing is that the market is shaky.

So you decide to postpone. A year goes by, then another. You start to think it’ll never occur, but then something miraculous happens.

One of the hottest firms in Silicon Valley goes public. A company with a really high profile and a ton of expectations on its shoulders. The market welcomed it with open arms, leaving you with one nagging thought: “If it went public, maybe I can too.”

It’s groupthink, trend following, mob mentality. Call it what you will, but I’ve seen it happen all the time, both on the stock market and in life. People do not make decisions independently; they look for confirmation in their social groups.

In other words, CEOs copy other CEOs.

Why Is Cloudera Stock so Cheap?

The folks behind the Cloudera IPO are aiming low.

They are issuing a Cloudera IPO price that’s far below expected, partly because they want to downplay expectations. Here are the specifics:

  • Stock Exchange: NYSE
  • Ticker Symbol: CLDR
  • Financing Target: $200.0 million to $242.0 million
  • Number of New Shares: 2.25 million
  • Cloudera IPO Price: $12.00 to $14.00
  • Cloudera IPO Valuation: $1.79 billion (at most)
  • Previous Valuation: $4.1 billion (in 2014)

No, you didn’t misread the last two lines.

Cloudera did suffer massive setbacks over the last three years. But does that mean investors should steer clear of CLDR stock? Not necessarily. To understand why, you have to learn the backstory of Cloudera. Here’s what went wrong.

Intel Corporation (NASDAQ:INTC) had been a major investor in the financing round that took place in 2014. At that time, The Wall Street Journal reported that Cloudera stock would be worth a cumulative $4.1 billion. (Source: “The Billion Dollar Startup Club,” The Wall Street Journal, February 18, 2015.)

Now the company is going public for much, much less than that amount.

Why?

The answer is pretty simple: Cloudera didn’t grow revenues as fast as it expected.

There was a lot of talk about “$1.0 billion in revenue,” but it didn’t happen that way. Cloudera recorded $261.0 million in annual revenue last year. Not bad, but nowhere near $1.0 billion.

Does that mean investors shouldn’t invest in Cloudera stock, given the planned Cloudera IPO in 2017?

Like I said before, not necessarily!

The Cloudera IPO price already took a beating. Investors like Intel are going to suffer—that much is certain—but we can profit from their pain. Expectations are super low for the company, because it’s already aired its dirty laundry.

Some IPOs end up bloody because management wants to reach for the highest possible valuation. They want to go to their CEO buddies and measure valuations. But Cloudera already took a write-down. So what can the market do to punish it for a revenue shortfall?

Nothing, really.

How Risky Is Investing in Cloudera IPO?

As always, there are risks in investing. Anyone who says otherwise is a liar or a fool.

Cloudera is in the emerging business of data analytics. Like all emerging industries, there is huge upside mingled with potential downsides. These industries aren’t for the faint-hearted.

For instance, data analytics is about helping companies make sense of information.

Every major business on the planet is dealing in data these days. But without the help of data analytics software, they have no idea what any of that information means. Cloudera sells them that software.

There is huge upside in this market—we’re talking gains of 300% or 400%—but there are also risks.

Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOG) are competitors in this business. It’s possible that they can bully Cloudera. Big companies have been known to do that before, even in the technology sector.

On the other hand, Cloudera is a specialist.

It can devote 100% of its time to this one business line, whereas Amazon and Google have to juggle all sorts of things. Moreover, clients may already be hosting their services on Amazon or Google’s data centers. This could work to Cloudera’s advantage.

No company puts all their eggs in one basket.

It’s far too risky for them to depend on Amazon or Google for all of their computing needs. They could be taken advantage of!

In other words, Cloudera stock is a mixed bag. It’s possible investors could walk away from this stock with triple-digit returns, but nothing is guaranteed. Like with everything else in this chaotic world, chance can intervene and tip the scales in either direction.

Conclusion: Should You Invest in Cloudera IPO?

Only you know the inside of your stomach. Is it made of iron? Because that’s what it takes to invest in risk-capital industries.

The Cloudera IPO is certainly one of the big opportunities of 2017, especially since the share price has been slashed. It’s amazing that venture capital investors are taking the haircut in order for us to get a fair shot at Cloudera stock. That almost never happens.

I find those signs pretty encouraging. Not to mention that Cloudera’s losses are shrinking at a steady pace. It’s possible, even likely, that we could see Cloudera stock outperform in 2017 because expectations are so downbeat.

So, in conclusion, I am cautiously optimistic on the Cloudera IPO in 2017.