The all-stock purchase of Hortonworks (NASDAQ:HDP) by Cloudera (NYSE:CLDR) sent shares in both companies rocketing over 20% overnight, even while the rest of the market was falling. Analysts upgraded CLDR stock after the announcement — an all-stock deal with Cloudera shareholders getting 60% of the resulting company and management control.
I wrote favorably about Cloudera stock last month, after it beat analyst estimates with its subscription services.
While both companies were formed to support the open source Hadoop management program, and reporters described the companies as competitors, their offerings are complementary. Hortonworks is focused on connected data platforms to the Internet of Things, at the edge of networks, while Cloudera offers analytics and a data warehouse for the cloud core.
CLDR: Seeking Open Source Profits
Both companies based their products on the same open source framework. Hadoop, named after a toy elephant based on a Dr. Seuss character, was originally built on a technology called MapReduce, used by Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google in its searches, by a team around Doug Cutting, then by Yahoo and now chief scientist for Cloudera. The code base for Hadoop is managed by the Apache Foundation and Cutting is a former Apache president.
While the open source paradigm is powerful for developers, bringing people from many different companies together to work off a rising platform, and enormously important for users, who get the benefits and can download the code for free, it’s not always great for the companies built to support the code. CLDR stock has been no exception.
Selling support, Cloudera’s original business model, seldom creates a big company. Some firms have switched as a result to an “open core” model, in which only some features are open source and the rest are proprietary.
Cloudera chose not to go that route, and first created a Hadoop stack, then a data warehouse and finally software delivered as a service to client clouds. Revenue more than doubled from 2016 to 2018, and is on pace to exceed $400 million this year.
Hortonworks, meanwhile, joined a host of Apache projects into a framework, supporting multiple data sources and formats, then grew through acquisitions and alliances with companies like Microsoft (NASDAQ:MSFT) and SAP (NYSE:SAP). Hortonworks had sales of $261 million in 2017 and is on pace to exceed $320 million this year, but neither Cloudera nor Hortonworks is profitable.
Why Buy CLDR Stock?
Cutting, whom I interviewed in 2010 while keynoting an Apache conference in Atlanta, had a pithy reaction to the deal, tweeting “we’re putting the band back together.”
But the deal means more than that. It means that open source business models have evolved from simple support to profitable services, while the cloud has evolved from data centers to systems extending to the network edge.
The two companies are now ready to automate enterprises, not just helping people understand what their machines are doing but managing those machines. The so-called Internet of Things, in which intelligence is added to inanimate objects so they can manage themselves and people only handle exceptions or provide top-level direction, is now ready to transform society.
That may sound like word salad. Put simply Cloudera now provides tools that let companies automate everything and sells them by subscription so that it makes money doing it.
The Bottom Line on Cloudera Stock
The combination of Cloudera and Hortonworks is a company with $720 million in revenue, positive cash flow and over $500 million in the bank, with no debt. It also has a coherent, achievable business mission.
I thought Cloudera stock was a buy last month, and I still think so.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in MSFT.
