Is Informatica Under a Cloud?

NEW YORK ( TheStreet) -- If you're a current Informatica ( INFA) investor, Thursday's warning couldn't be much worse.

The cloud data company has lost about 28 percent of its market cap from Thursday's close after the company issued a second-quarter guidance warning. Expectations of 36 cents or more per share are now closer to 27 cents or 28 cents per share.

Unfortunately, what truly captures Wall Street's attention is guidance. Informatica already was trading below the widely followed 200-day moving average, adding fuel to the liquidation based on chart technicals.

The chart to watch for Informatica is the weekly chart. In the weekly chart, you can find last week's drop moving through the 200-week moving average. The 200-week moving average offers support. More important, this moving average is still in a bullish trend, suggesting Informatica will once again trade above $32.50 soon.

Revenue is a relative bright spot for Informatica. Revenue is not expected to drop much from last year and come in near $188 million to $199 million for the quarter. Based on a price-to-earnings multiple of 32, Friday's drop is not surprising. Any time a stock is over a multiple of 20 the share price becomes vulnerable to the slightest turbulence.

Informatica's CEO Sohaib Abbasi stated that for the quarter ending in June:

"Clearly, we did not adapt as rapidly as we should have to the changing macroeconomic environment, especially in Europe.

"I met with several customers where we were expecting their business last quarter. In almost all of those cases I sensed a cautionary tone that they were taking a little extra time, a little more diligence."

Insiders sold a copious number of shares in the previous six months. Insiders were not buying either. With just over 800,000 shares held by insiders, it's clear management hasn't quite put its money into the company. I like to see management and investors interests aligned. With Informatica, I can't say it's the case. Institutional investors appear to have received the message loud and clear. Big money liquidated over 9 percent of their holdings.

Based on my experience with gap-downs following lowered guidance similar to Informatica, investors will see short-term lows Monday or Tuesday. Friday's low testing $43.50 with a strong bounce higher suggests it won't take much time for the market to figure out the extreme reaction may be somewhat overdone.

Bargain hunters and short-sellers covering positions could push the price up quickly in relation to the gap-down price. Looking at the chart, I expect short-term resistance near $32.50 and again at $40. Round numbers often attract like a price magnet and repel, causing a bounce. Expect elevated volume on Monday, and bargain hunters to start positions under $30 as an entry. Informatica doesn't have debt, and if this quarter proves to be just a minor hiccup, this week should create a buying opportunity. The safe play is to wait it out.

There is no hurry jumping on board with Informatica. Stock dumping as a result of warnings like this one take time for sellers to rotate out of and buyers to find value. Watch for the second break above $32.50 as the one that "sticks."

Operating margins, while already low compared to selected peers, appear to have room to grow if revenue begins climbing again.

Other companies to keep an eye on for warnings and results include:

Microsoft ( MSFT) reports after the close on July 19th. The mean estimate is 63 cents per share in earnings.

Oracle ( ORCL) reported in June and has gained about 10 percent in market value since. The problems Informatica finds itself in don't appear to be a concern for the database giant.

International Business Machines ( IBM) reports after the close on July 18. The mean estimate is $3.42 per share in earnings.

IBM shares fell Friday along with the overall market in general. It's hard to say what impact Informatica had, if any, on Big Blue. CA ( CA) reports after the close on July 26. The mean estimate is 56 cents per share in earnings.

CA was not immune to the weakness Friday. Shares dropped almost 2.5% but well above the 200-day moving average.

Take a look at the comparison table, and it's not a surprise what happened to Informatica. Operating margins are second only to IBM for the lowest. Microsoft and Oracle margins are twice as large. None of the companies have a "sell" rating; however, a sell rating may be on its way for Informatica.

What's the best play with Informatica? There should be a particularly attractive trade coming up Monday and or Tuesday. Near the end of the day, if still trading lower, sell out of the money puts. Investor fear of continued losses tends to push portfolio insurance prices up dramatically, at the same time the stock will likely find support.

It's not one to get greedy with so hold on for a few days and as the implied volatility falls (hopefully with a nice dead-cat bounce) exit out with a quick hit and run for profits. Otherwise, for longer-term investors, the best play is to wait until we are closer to the next earnings release for an entry.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
At the time of publication the author did not hold a position in any stock mentioned.

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