Cloudera sets IPO price far below earlier valuation estimates

cloudera

In a move that’s likely to throw cold water on investors who have been hoping for a rally in enterprise software stocks, Cloudera Inc. set the price range for its initial public offering today that implies a market capitalization of less than half the valuation it received in March 2014.

The big data company said it will sell 17.3 million shares of its common stock in an IPO later this month at a price of between $12 and $14 per share. The resulting valuation of $1.79 billion is well below the $30.92 per share that Intel Corp. paid in 2014 when it invested $740 million in Cloudera as part of a $900 million round. It’s also quite a bit below the $17.85 per share that Cloudera set when it granted stock awards to employees in March, according to the company’s S-1 filing.

On the surface, Intel’s enthusiasm hasn’t flagged. Cloudera said the chip maker is interested in buying up 10 percent more of its shares on top the 22 percent it already owns. That move is probably a defensive one, however, intended to avoid further dilution of Intel’s ownership stake.

Cloudera has raised a total of $1.04 billion from investors in eight funding rounds, according to Crunchbase. The company also has significant backing from Accel Partners, Greylock Partners and several angel investors, including Diane Greene, senior vice president for Google’s cloud business.

The S-1 filing lists Cloudera’s full-year 2016 revenue as $261 million with a loss of $187 million, which was down slightly from a loss of $203 million on $166 million in sales in 2015. Although a nearly 60 percent growth rate is respectable, it’s below some of the breathless forecasts analysts issued a couple of years ago. When it initiated coverage of Cloudera in 2015, research firm Manhattan Venture Partners estimated that the company would bring in $199 million in revenues in 2015 and $329 million in 2016. It pegged the total valuation at the time at $4.7 billion.

Is Cloudera’s valuation a disappointment? Not completely, when you consider what has happened since the first estimates of three years ago, according to Rohit Kulkarni, managing director and head of research at investment advisory firm SharesPost Inc. Competitor Hortonworks Inc. was also a pre-IPO investor darling, but its shares have declined 60 percent since its 2014 offering.

“Coincidentally, Cloudera’s IPO pricing is roughly 60 percent below its 2014 private funding round,” Kulkarni said. This isn’t unusual; about one in six venture-backed companies goes public below its private valuation, he said. “We think such a valuation reset narrows the perceived gap between private and public valuations. The IPO market for venture-backed companies remains alive and healthy,” Kulkarni said, noting that the lower dollar figures could also make big data companies more attractive acquisition targets.

Still, the lowered estimate may raise new questions about the viability of business models based on sales of open-source software, said Wikibon Chief Analyst David Vellante. Although Cloudera’s business is a hybrid of open-source and proprietary software, it depends heavily on the success of the Hadoop ecosystem for its growth. “Hadoop has been a story of ‘profitless prosperity,’ where the growth is tremendous but those making real money are the practitioners much more so than the sellers of software,” Vellante said. Wikibon is a sister company of SiliconANGLE.

Value should also take into account the ecosystem that Cloudera and other Hadoop players have created, said SiliconANGLE co-Chief Executive John Furrier. “The value shifts to the ecosystem,” he said. “It’s a haircut [for Cloudera] in the short-term, maybe, but the ecosystem is going to create a flywheel effect, and there will be huge valuations that emerge out of it. No one has yet has pegged the valuation of an ecosystem.”

Investors have been hoping that the enterprise software market, which last year suffered through the worst IPO drought since the  recession, was recovering following recent successful offerings by Okta Inc., MuleSoft Inc. and Alteryx Inc. They will be watching even more closely when Cloudera debuts, hoping that today’s announcement reflects conservatism rather than pessimism.

Furrier and Vellante talked about the impending “haircut” on Cloudera’s valuation at last week’s DataWorks Summit in Munich:

Photo: Robert Hof