Why Cloudera’s IPO Pricing Is An Unsurprising Disappointment

TL;DR: Cloudera’s proposed IPO valuation is far below its last private valuation set in 2014. That’s disappointing for its investors, and it is also completely unsurprising. Let’s explore why.

Cloudera, an enterprise-facing Hadoop shop, set its proposed IPO share price range at $12 to $14 this week. At $14 per share, the company will raise over $240 million and secure a valuation of $1.79 billion, according to various public calculations.

That a unicorn is about to debut in the public markets and raise hundreds of millions of dollars in the process may sound encouraging, but in this case, there is more shadow than sun. Cloudera was valued at more than $4 billion in 2014 when Intel invested $740 million into the company. Cloudera’s IPO valuation is likely to land under half of its prior private valuation. That’s steep.

Why would Cloudera proceed with an IPO at such a discount? That’s a simpler question than you might think, and it is one we’ll answer.

Before we do, however, is there a chance that Cloudera is hanging back for the moment, with a stiff bump to its price range in the offing? Not according Jared Sleeper, an investor at Matrix Partners, who told Crunchbase News that he is “not optimistic” that Cloudera’s IPO value “can be raised significantly from [the proposed range].”

So a down IPO it is. Let’s understand why.

Mismatch

After Cloudera filed its S-1 documents, Crunchbase News wrote that its IPO might “test unicorn valuations” as its bucket of revenue, revenue growth, and losses didn’t appear to add up to a $4.1 billion valuation. Around that time, the company was said to be pursuing a flat valuation in its IPO.

These pages were skeptical, saying:

What we are seeing [after looking at its core financial numbers] 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.

That potential has become proposed reality.

What were our arguments that led to that doubt concerning a proposed $4.1 billion public valuation, which has now been born out by the initial IPO price range? The thumbnail is that Cloudera loses too much money while growing too slowly. Sleeper agrees:

“Investors look at both growth and profitability when valuing SaaS companies. In Cloudera’s case, the company is growing quickly, but much more slowly than a year ago. It is also deeply unprofitable today, more so than any other SaaS company I keep track of. Putting the two together and considering the Hortonworks comp, the company deserves a below average SaaS multiple[.]”

That is a good summation of our prior argument. Note how it echoes our distillation of the issue into growth being too small and losses being too large.

Growth And Losses

As noted previously, Cloudera’s 57.2 percent year-over-year revenue growth falls under recent IPOs Mulesoft and Alteryx’s own respective paces of expansion. It’s also above Box’s YoY revenue growth. (Box is a not a fresh IPO, but it is an important company all the same.) Revenue growth impacts the amount of money that investors are willing to pay for a company’s current revenue. Or, the faster a firm is growing today, the larger the revenue multiple it can command. Investors, in that context, are willing to pay more today for a company’s current top line since they expect far more to come.

And with our three growth measuring sticks on hand — Mulesoft, Alteryx, and Box — we estimated that Cloudera might warrant a revenue multiple of 8. That, Crunchbase News noted at the time, “would value the company at just under $2.1 billion.”

A bit of an overshoot, given the company’s proposed valuation and Sleeper’s comment that the firm won’t be able to raise its price. What might we have missed, leading to an overstatement of what Cloudera might be worth?

I have a hunch. See if you can spot the bad news:

(You can find a larger edition on page 69 if you are so inclined.)

The problem in the above S-1 is similar to the problems that Carvana posted. Both companies posted what appear to be record net losses in the quarter sequentially preceding their IPO. In short, they lost the most money that we can see in their results—right as they approach the public markets for more dosh. That’s not ideal.

But it does explain, perhaps in part, why Cloudera is proposing to go public at a discount to an already discounted valuation estimate.

Down, But Not Out

None of this is to say that Cloudera’s future is in doubt. We are dealing with a valuation question; it’s not an existential crisis. Of course, down rounds do have negative impacts; regardless, Cloudera is about to raise a stack of new money to keep on growing.

But for the market, Cloudera’s impending results provide a stark lesson: your prior private valuation is bunk if it’s out of sync with public-market comps.