Cloudera’s IPO will test unicorn valuations
Cloudera filed to go public mid-day last Friday, releasing a set of financial numbers that were the locus of anticipation: How would the company’s recent performance stack up to its $4.1 billion valuation set three years ago?
Before Cloudera published its S-1 document — detailing its recent quarterly results and several years of financial data — reports indicated that the company would pursue a $4.1 billion valuation in its IPO, flat from its last private round when Intel poured $740 million into the company.
That Cloudera might aim for a level valuation with a dozen or so quarters of additional growth under its belt was notable. (Crunchbase News reached out to Cloudera regarding the valuation figure. The company declined to comment.) The situation raises an obvious question: Did Cloudera’s investors incorrectly estimate the potential future value of the company in 2014 if it intends to secure a flat valuation today?
It is likely fair to say that Cloudera’s investors were at least partially incorrect about where the company’s value would end up by the first quarter of 2017. No one alive deploys three-quarters of a billion dollars in capital for a flat return over a multi-year period. And doubly, Cloudera may in fact still be overvalued at the proposed $4.1 billion valuation when compared to certain public market comps.
We’ll need to do some work to get there, but if you come along for this walk, I promise that we will learn something. Take my hand.
Cloudera’s guts and bolts
All Cloudera results are set to its own fiscal calendar, a yearly period that ends on January 31st. That recurring annual chronology is common among companies that sell to larger customers, as the month of December is slow, and sales denizens like to close their quarters on months that are non-holiday infused. So, effectively, January becomes your December.
In its most recent fiscal year, which wrapped January 31st, 2017, Cloudera reported aggregate revenue of $261.0 million, up 57.2 percent from its preceding fiscal year. In that year, Cloudera’s revenues were a more modest $166.0 million.
Cloudera also lost $187.3 million — down 7.8 percent from its gut-busting prior-year loss of $203.1 million. Those are GAAP results, mind, not adjusted figures. (GAAP, a boring acronym, means: “No accounting bullshit is allowed; how much did you really lose or make?”)
The company has a mere $74.2 million in cash and equivalents in the bank. Compared to its quarterly losses from operations in its last few fiscal quarters (-$61.0 million, -$44.0 million, -$38.8 million and -$43.5 million), that amount of cash implies Cloudera is raising money because it needs to. This isn’t uncommon in IPOs, but it is worth bearing in mind, all the same.
If all those numbers blurred slightly in your head, it’s understandable. What we need to do now is uncover what Cloudera is, in fact, worth. Spoilers: Cloudera is worth more than nothing and far less than the most valuable public company in the world, Apple.
From that, let’s narrow it down.
The $4.1 billion question
Cloudera is a deeply unprofitable company with a history of both losses and quickly expanding revenue. So too, of course, are nearly all technology IPOs.
Antigravity exists, however, between revenue growth and losses. The faster you grow, the more money you can lose both in raw dollar terms and on a comparative basis, while managing to keep your investors content. If you grow at, say, one billion percent per year, doubling your losses isn’t a big deal. However, if you grew just 10 percent last year, and you lost 200 percent as much as the year before, you might be dead.
(If you can unpack the inherent importance of baseline metrics in those examples, you didn’t need the examples to grok the point, did you?)
So Cloudera loses money, but we need to decide if that’s a problem or not. And to get a handle on it, we need to better understand growth.
Let’s put Cloudera’s 57.2 percent revenue growth rate into context compared to two recent, enterprise-facing tech IPOs, and everyone’s favorite SaaS company, Box. From TechCrunch:
MuleSoft, for example, currently trades at a revenue multiple of around 15 (trailing). It grew its revenue just over 70 percent last year.
Alteryx, another recent IPO, is trading at around a 10x trailing revenue multiple. It grew its revenue by just under 60 percent last year.
Box, a favorite market comp for private enterprise startups, commands just a 5.34x trailing revenue multiple. It grew just under 32 percent last year.
The quick lesson here is that companies get a higher revenue multiple the faster they grow. That’s reasonable. The faster a firm is growing today, the more future dollars of revenue investors buy when they purchase its shares.
As you can see, Cloudera slots in just under Alteryx, and far ahead of Box, in terms of its growth rate. Let’s go ahead and say, staring between the two comps, that the top line expansion range indicates that a revenue multiple of 8 is a reasonable estimate for what Cloudera might be able to command. That would value the company at just under $2.1 billion.
Not a good result when compared to Cloudera’s previous $4.1 billion valuation.
But what about Hortonworks, another company operating in the Hadoop space. What are its own figures? Keeping the same structure as our prior notes, here are Hortonworks’ own metrics:
- Hortonworks, a fellow Hadoop player, currently trades at a revenue multiple of 3.5 (trailing). It expanded its revenue 51 percent compared to its year-ago annual period.
Two things should stand out to you:
- At that revenue multiple, Cloudera is worth less than one billion dollars.
- Hortonworks is trading at a revenue multiple discount to Box’s own, despite growing more quickly.
There’s an argument to be made for why that may be reasonable: Box is now free cash flow positive, unlike Hortonworks. Box also has higher revenues in raw dollar terms, and lower net losses in raw dollar terms, making its operating margins far superior.
There’s more to valuation than just growth percentage and loss rates. But, keep in mind that Cloudera and Hortonworks both have growth rates in the 50s, so the companies are close.
After observing a reasonable market analog in terms of product direction (Hadoop) and growth, it isn’t clear how Cloudera gets to a $4.1 billion valuation.
What we are seeing here is a potential mismatch between Cloudera’s prior private valuations and what it can command in the public.
Why does that matter? It matters in that if the mismatch persists, then we could see a unicorn not merely price at a modest discount to its past-private valuation, but at a fraction of that price. And that could mean there are other paper unicorns out there that could come out of their own eventual IPO process looking more origami than broadsheet.