Description

Cloudera, an enterprise open-source software company focused on data storage, analytics, management and security, is trading at ~3.5x its most recently reported July 2020 quarter annualized recurring revenues (ARR). This makes CLDR a cheap software stock even by historical SaaS standards; however in today's frothy market, where multiples of 20 - 30x out year ARR aren't uncommon (to say nothing of the recent cloud-database IPO of SNOW, at nearly 75x out year ARR), CLDR is quite simply on sale. After experiencing an initially sloppy post-merger integration phase with its leading competitor Hortonworks (HDP) in 2019, CLDR has stabilized its results and is posting solid, double digit ARR growth with a path to accelerate growth to 20% over the coming year. CLDR is already posting double-digit operating margins, and given the operating leverage inherent in its largely expansion-based sales motion, the Company could push these margins to 25% over the coming years as the top line grows.  

We expect CLDR shares to perform well for the following reasons:

• CLDR's current 12% ARR growth rate is being driven by customer renewal activity at higher prices post the HDP merger and by upsells of adjacent data science and data in motion products to CLDR's core data management customers. CLDR is a sticky product with its core F1000 customer base who tend to use more data over time and thus expand deployments with CLDR, which is an embedded tailwind to growth. 12% ARR growth with 50%+ incremental EBITDA margins should trade for at least ~5x EV / S vs. current 3.5x.  
• For years, CLDR and HDP were just "mining the base" of existing on-prem and hybrid architecture customers as sexier upstarts like Snowflake and Databricks won market share along with the public cloud vendors AWS, Azure and GCP. CLDR and HDP then merged out of necessity to achieve profitable scale and a coherent product roadmap that could eventually compete against and leapfrog these new entrants. Last Fall, CLDR for the first time launched its CDP public cloud offering to enable Cloudera customers to migrate workloads into the public cloud platforms of their choice, and in Summer 2020 launched its CDP hybrid cloud offering. Our checks suggest that the CDP Hybrid Cloud offering, which allows customers to manage and govern all of their data stored across their organization on numerous public cloud platforms, private clouds and on-prem, is exciting to customers and partners and has the potential to create a material growth lift for CLDR in 2021. As discussed, CLDR's current valuation is low even for a 12% ARR grower, however should growth accelerate to 20% or more on the back of the CDP product cycle, shares could conceivably re-rate to a "rule of 40" multiple of between 7 - 10x forward revenues, implying a $20 - $30 stock in 12 months time.     
• CLDR has consistently exceeded its guidance for subscription revenues and operating profit over the past four quarters, and we believe the October quarter could potentially surprise by a wider than normal margin given that it will be the first full quarter of CDP hybrid cloud bookings, which our checks suggest could be material and a narrative-changer. 
• In June of 2020, Bloomberg reported that CLDR had retained a financial advisor to respond to inbound interest in acquiring the Company from PE firms. We certainly think PE could acquire CLDR for a 50%+ premium to current trading levels and achieve a favorable IRR. There has also been reasonable speculation about a potential acquisition by IBM, given technology tie-ins and distribution partnerships between the two companies that were deepened as a result of the CLDR / HDP merger and the IBM / RHT aquisition. A CLDR acquisition would tack on less than half a turn of leverage for IBM even if they paid $20. Given CLDR's strong technology and customer relationships, and its forward-thinking roadmap to be the go-to, neutral partner of choice for F1000s for their hybrid cloud data architecture, we think CLDR does have strong strategic value.       

In any event, risk-reward definitely seems attractive at $10. We think $8 represents a likely floor for the stock at ~2.5x EV / ARR, while $15 - $20 of upside is attainable either with strong execution or in a takeout.

Catalyst

October Earnings (reported in Dec), acquired by PE or strategic, material CDP customer wins announced.