Investing in a fast-growing company has a lot to do with investor confidence, and investors appear to be rapidly losing confidence in Cloudera (CLDR) - Get Report .  

Last week, disappointing results and the news that its CEO was stepping down without a permanent replacement being named led to its share price cratering more than 40% to an all-time low. However, the time to start bottom picking has not yet arrived for this stock.

From Rosy To Questionable

Cloudera's IPO early in 2017 was met by great excitement with its stock rallying more than 20% on the first day of trading. What more could shareholders ask for than a rapidly growing data cloud company?

The company's medium-term and long-term prospects looked rosy, as customers need data analytics and their data workloads show no signs of slowing down.

Then, throughout fiscal 2019, investors started becoming slightly skeptical, as Cloudera's growth rates went from growing at a sizzling 40% top-line growth in fiscal 2018 to a more modest 30% top-line growth in fiscal 2019. However, despite its top-line growth slowing, its losses remained large, ending 2018 with close to $200 million of net losses.

Then, Cloudera attempted a different strategy, merging with data management firm Hortonworks in an all-stock merger, with the combined company worth just over $5 billion.

Cloud Market -- Too Much Competition?

So how does the combined Cloudera and Hortonworks company go from being valued at more than $5 billion seven months ago to less than $1.5 billion presently?

The merger of two loss-making enterprises, which can make perfect sense on paper, doesn't always succeed in practice. Also, on deeper analysis, in the highly competitive cloud space (arguably more so than elsewhere), customers demand certainty.

Customers do not want to spend scarce resources such as time, energy and investment, deploying their data workloads via a company which not only lacks clarity over its roadmap but now, will be going forward without a permanent CEO.

To complicate matters, Cloudera is launching a new platform called Cloudera Data Platform (CDP) that's focused on seamless cloud migration and automation. The imminent new service has caused Cloudera's customers to hold off on purchases from Cloudera's legacy offering, resulting in a temporary trough in bookings.

Valuation - No Margin Of Safety

Image placeholder title

On a revenue multiple, Cloudera's present valuation appears to be a bargain when compared with its rapidly growing peers. However, given the huge uncertainty facing Cloudera's operations, paying up more than even 1x sales could in time be viewed as overpaying.

Moreover, as is often the case with software-based companies, the biggest portion of the company's cost is derived in the form of stock-based compensation. This form of compensation has the advantage of offering the company's cash flow a boost.

However, in time, as employees exercise their options, they will further dilute its shareholders. So while investors need to be mindful of Cloudera's cash flow capabilities, they also need to pay attention to the fact that since inception, Cloudera has yet to turn a profit and is expecting to incur net losses for the foreseeable future, according to its SEC filings.

In fact, looking ahead for fiscal 2020, Cloudera is guiding for its EPS numbers to be negative $0.38 to $0.32, reinforcing that despite a strong narrative of synergies, a further $100 million of net losses could be in the cards.   

The Bottom Line

Cloudera had a lot going for it at first glance. But now, post-merger with Hortonworks, together with continual losses and weak guidance, investors are questioning whether it is really worthwhile paying up for a not-so-fast growing cloud company, with no CEO and a lot of competition.

Investors are best waiting in the sidelines and waiting for the dust to settle rather than going in and attempting to catch this falling knife.