Cloudera (CLDR) has been on a roller coaster ride. Its stock has been a huge underperformer in the bullish market of 2019. However, recently, its fortunes appear to have improved and there are emerging reasons to be optimistic on the name. For now, though, the risk-reward profile is still not quite attractive enough and investors should avoid getting involved with the stock.
Growth Gets A Boost
Cloudera had been a name which could do no right. It went public at $15 a share and over the next two years, the stock would see its valuation cut by two thirds, hitting a low of $4.89 at one point during this summer. Having said that, recently its shares have started increasing in value, which got cemented on the back of its strong Q2 2020 results when Cloudera announced not only strong quarterly performance but also, that it was raising its full-year revenue guidance.
Shareholders were elated and the stock has rallied by more than 20% over the past two weeks. On the surface, it is easy to see reasons to be optimistic, with Cloudera's revenue growth rates once again re-accelerating.
Underneath these bullish outlooks, however, investors should note Cloudera was able to increase its full-year guidance on the back of its acquisition of Hortonworks.
Furthermore, Cloudera does not break out just how big an impact Hortonworks' performance has had. In other words, investors have no idea of just how meaningful Cloudera's organic growth has been versus its inorganic growth.
At the start of August, Carl Icahn's involvement with Cloudera was announced. The legendary value investor was long the name. By mid-August, it was announced that Icahn and Cloudera had reached an agreement which would see Icahn Enterprises appoint two names to Cloudera's Board and bring his ownership in Cloudera to just under 19%.
In an ever-evolving market, one has to ponder whether Icahn's stake is due to him seeing value where others only see a dead company walking? Or whether the notable absence of any cloud-technology companies in his portfolio, compelled the investor to get involved with the name.
Given that a close to 19% stake in Cloudera amounts to less than 1.7% of Icahn Enterprises portfolio might mean that Icahn is not overly confident in the name. On the other hand, Icahn is notoriously selective of the companies he selects and his portfolio is amongst the most concentrated on Wall Street, with fewer than 17 names in the portfolio.
Is it possible that Icahn is eyeing up the fact that close to 25% of Cloudera's market cap is made up of cash and equivalents? And that more can go right at this valuation than can go wrong? On balance, one has to surmise that Icahn appears to believe that there are possible returns to be made from Cloudera.
Valuation - Cheap If It Can Stabilize
On a P/Sales metric, Cloudera certainly looks cheap, particularly when compared with its peer group. The problem for shareholders is that Cloudera does not generate much cash flow, and from a GAAP perspective, its income statement has yet to turn a profit.
Consequently, it makes it highly challenging for investors valuing the company to argue that there is enough underpricing in this stock. However, it should be noted that looking back several months and even a year ago, investors had been willing to pay approximately double its current trading price, implying that if Cloudera were able to stabilize operations and go back to executing how it had been doing, investors might also be willing to pay the sort of prices they had been paying in the past.
The Bottom Line
For now, the market appears to be willing to give Cloudera the benefit of the doubt.
Its shares are certainly picking up momentum, and since the stock is highly shorted, those that are short the name are considering that at the moment it's not worthwhile the risk to remain short the name.
Having said that, the argument to stay long the name does not appear to be overly compelling either. Overall, investors are better off to avoid the name for now and deploy their savings towards less risky investments.