Early investors in Facebook have quadrupled their stakes in five years. But public offerings in the tech sector aren't guaranteed tickets to big riches, as IPO-era buyers of much-hyped market newbies such as Zynga and CafePress can attest.
Data management and analysis specialist Cloudera just announced its intention to join the public markets. Should you jump on this bandwagon right away, or is this a value destroyer in the making?
Nobody knows for sure, of course, but here's how you should look at Cloudera's balance between risk and opportunity.
What will Cloudera be worth?
The company hopes to launch the IPO "as soon as practicable" now that the paperwork has been started. Anonymous insiders close to the Cloudera IPO have told Bloomberg that the company aims for roughly $4.1 billion in initial market value. That's right in line with the implied market value of a $740 million investment Intel (INTC 1.46%) made in 2014.
In other words, Cloudera's theoretical market value hasn't increased in the past three years, a period packed with interest and business activity in the company's chosen target markets. This looks like a lowball estimate, setting Cloudera up for some drastic jumps on its first day on the market -- perhaps followed by sharp and unpredictable corrections.
Buying into IPOs is a risky game at best, but a big gap between the market value at launch and the perceived growth opportunity can make it worse. It's the kind of thing day traders revel in, which often translates into a poor time for long-term investors to take a position.
Will this stock ever make sense for long-term buyers?
So Cloudera looks like a risky bet on Day One. That said, I'm going to keep a close eye on this company and stock as it matures. Cloud-based analysis of huge data sets is a big idea whose time has come, and Cloudera's Hadoop platform is a pioneer in that field.
This company is poised to create a ton of shareholder value in the coming years, following an open-source path similar to Red Hat (RHT). Both companies are deeply committed to software platforms with large and active development communities. I already own Red Hat shares, and my investment thesis is based on exactly the qualities that these two companies have in common.
Post-IPO share prices might run up to crazy valuations and stay there, in which case I'd be happy to wait for an inevitable market correction before taking further action. That pause would also let me follow Cloudera and its management as they learn the ropes of the public market.
Moreover, the young company's earnings and operating cash flows are still firmly negative. On the upside, sales rose 57% in the recently closed 2017 fiscal year, and the soft balance sheet will get turned inside-out when the IPO proceeds arrive. Let Cloudera find its sea legs before you even consider backing up the truck.