Given Cloudera (NYSE:CLDR) stock's modest valuation because of management's disappointing fiscal full-year guidance, the market doesn't seem to realize the company's transition to the cloud will materialize by next year, which creates an attractive investment opportunity.

Weak short-term performance

Cloudera provides data analytics software capabilities. And according to the research firm IDC, the amount of worldwide data should grow at a compound annual growth rate (CAGR) of 27% by 2025. That bodes well for Cloudera, but its on-premises offering doesn't address the surge in demand for cloud computing.

Thus, despite fiscal first-quarter results above expectations, year-over-year revenue growth of 12% to $210.5 million remains modest. 

And because of the coronavirus-induced recession, management communicated disappointing guidance. It expects fiscal full-year revenue of $825 million to $845 million, which corresponds to low year-over-year revenue growth of 5.1%, based on the midpoint of that range.

Also, despite that first-quarter low-double-digit revenue growth, sales and marketing still represented a significant cost -- 53.8% of revenue. Granted, with scale and synergies following the acquisition of the big-data specialist Hortonworks last year, operating costs as a percentage of revenue should decrease over the long term.

But the midpoint of forecast full-year non-GAAP (adjusted) operating income of 10.8% remains low. Taking into account share-based compensation (SBC) that management excludes from its non-GAAP calculations (most companies do), Cloudera is likely to post generally accepted accounting principles losses as SBC reached 27.7% of revenue during the previous fiscal year.

Clouds on blurry computer data center background

Image source: Getty Images.

Shift to hybrid and multicloud

Looking beyond these short-term results, management announced last year it would focus on developing a hybrid cloud solution, Cloudera Data Platform (CDP), that would run in a transparent way across any combination of public and private clouds with the respective offerings CDP Public Cloud and CDP Private Cloud.

During the last earnings call, CEO Rob Bearden disclosed that the number of customers who have purchased or are actively using CDP Public Cloud had tripled -- from a modest number of more than a dozen customers last quarter, though. He also announced CDP Private Cloud would be available at the end of July.

CFO Jim Frankola indicated revenue from CDP offerings will become meaningful by next fiscal year. And thanks to that transition to a hybrid and multicloud offering, he forecast revenue would grow annually by about 20% over the long term, which corresponds to his precoronavirus market growth estimates. That represents a significant improvement compared with the forecast single-digit revenue growth this year.

Modest relative valuation

However, given its modest valuation relative to cloud peers, the market doesn't seem to believe Cloudera will succeed in its transition to the cloud. Based on the midpoint of full-year revenue guidance, the market values the company at an enterprise value-to-sales ratio of 3.2. 

Comparing Cloudera with other cloud big-data specialists isn't straightforward as such competitors remain privately held (Snowflake, Databricks). But the higher valuation ratios of other cloud vendors with similar growth rates and operating margins show that the market prices Cloudera stock at a discount.

CLDR Operating Margin (Quarterly) Chart

CLDR Operating Margin (Quarterly) data by YCharts

Granted, the company will be facing strong competition. Giant public cloud platforms such as Amazon's Amazon Web Services (AWS) and Microsoft's Azure also propose big-data capabilities.

But I estimate Cloudera's chances of success in its transition to cloud remain significant since the company differentiates from these tech behemoths thanks to its hybrid and multicloud solution that will prevent customers from being dependent on one public cloud vendor. And customers will be able to run their big-data workloads on different cloud provider platforms depending on pricing -- or any other criteria. Also, Cloudera's packaged end-to-end portfolio, which contains several open-source software options, simplifies big-data management as customers won't need to integrate different solutions or deal with multiple vendors. 

Attractive risk-reward ratio

There's no guarantee Cloudera will succeed in its transition to the cloud, though. But its low stock price relative to cloud peers corresponds to an attractive risk-reward ratio. 

Thus, in contrast with high-growth stocks that need to deliver exceptional performance over the long term to justify their lofty valuations, Cloudera represents an interesting alternative for investors looking for exposure to cloud computing in a secular growth market such as big data.