Over the past week, Cloudera’s upcoming IPO has caused much hand-wringing amidst speculation that it will be a down round – about 60 percent lower than its last private valuation in 2014.
As the largest enterprise software unicorn pursuing an IPO in 2017 and the sixth private tech growth IPO of the year, a down-round IPO raises a couple of key questions for investors. First, what does this mean for the IPO market in general? Second, why invest in Cloudera now?
What does it say about the broader IPO market? The headline is that a down-round IPO isn’t the end of the road for VC-backed IPOs in 2017. We have seen such IPOs in the past. Square, Box, and New Relic all went public below their private valuations, but today all three are trading above their IPO prices. Apigee also pursued a down-round IPO and was eventually acquired by Google at a solid premium. We estimate that roughly one in six VC-backed tech companies that go public do so with a haircut to the private valuation. Thus, a valuation reset approved by a relatively efficient public market could be a healthy sign for the company and the overall VC ecosystem.
A “glass half empty” interpretation is that there might be more such valuation resets in the pipeline, particularly for those unicorns that raised mega-rounds from “tourist” investors during 2014–2015. Nonetheless, we continue to believe that the IPO window is wide open, given the recent uptick in both offerings and valuations. In fact, we’d argue that a lukewarm reception to Cloudera’s down-round IPO could drive other VC-backed unicorns and CEOs to test the public waters soon!
Why invest in Cloudera now? Investors certainly have plenty of reasons to be cautious, including competition from public and private cloud companies, profitability outlook, and, of course, the most important factor: the valuation. However, we believe that long-term investors can make a credible case for investing in Cloudera’s IPO at a roughly $2 billion valuation, for the following reasons:
- Cloudera is larger and faster-growing than its counterpart, Hortonworks (HDP). We think size does matter in the ongoing cloud wars.
- Cloudera is less reliant on open-source software than its counterpart, which should help address the bearish concern about the lack of monetization/differentiation potential of open-source software.
- Cloudera has Intel’s strategic support and distribution capabilities behind it, which should help Cloudera’s operating leverage outlook, particularly with overseas sales and marketing.
- Cloudera operates at the intersection of several secular trends (Cloud, Big Data, IoT). If you believe large enterprises will feel a growing need for an independent company that operates on multiple cloud platforms (AWS, Azure, GCP) and remains location-agnostic (public cloud, private cloud, and on-premise), then Cloudera could be one way to play that trend.
- We think Cloudera’s sector is ripe for consolidation, which means that Cloudera, Hortonworks, and MapR are potential targets. Large tech companies including Microsoft, Amazon, Google, IBM, and Cisco have big aspirations in this space. Furthermore, there is always a chance that Intel will expand its strategic relationship and ownership proportion with Cloudera.
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