While working the open source beat for ZDNet during the last decade, one lesson became crystal clear to me: The primary benefits of open source go to the users, not the creators.
It’s in using open source to make things that you find of value, not in selling support for the code.
Cloudera (NASDAQ:CLDR) was founded in 2008 to commercialize Hadoop, a “big data” system built for the cloud. Hadoop analyzes huge piles of unstructured data quickly. It’s vital to the way businesses run today.
Three years later, another company called HortonWorks was formed around the same software. In 2018 the two agreed to merge in a deal worth $5.2 billion. Today CLDR stock has a market cap of $3.5 billion.
The New CLDR Stock
Rather than just sell support, Cloudera is now bundling its software into what it calls an “enterprise data cloud,” a platform it can install at a corporate premise or in a private cloud. The idea is to take open source tools and build proprietary insights for corporate and government clients.
While many companies have been built around support of open source code, very few have made money from it. Red Hat, bought by IBM (NYSE:IBM) for $34 billion last year, is the exception. It succeeded as the Linux operating system became integral to the cloud, and it expanded into cloud containers built with another open source system, Kubernetes.
But while Cloudera has seen growth, nearly 60% for the year ending in January, it continues to lose money, $336 million on $794 million of fiscal 2020 revenue.
Icahn Wants Out
Carl Icahn saw the growth of Cloudera and bought 18.4% of the company last year. Managers signed a standstill agreement with him last August, giving him two seats on the board.
The company followed that up in January by naming former Hortonworks CEO Rob Bearden to run Cloudera. The platform was one outgrowth. Publicity about a new channel push was a second. Hedge fund managers like Mark Tepper of Strategic Wealth Partners also tried pounding the table for the stock on TV.
But little has changed. Revenue for the April quarter was about the same as in January, and up just 12% from a year earlier. The losses continued at nearly the same rate.
So now Icahn wants out. He has management actively exploring a sale of the company, reportedly after receiving takeover interest. IBM, Microsoft (NASDAQ:MSFT), and private equity are all said to be in the frame as potential buyers.
Since spiking on news, however, CLDR stock has once again gone nowhere. It opened July 21 at 10 cents less than its June 9 close. Even if a buyer emerges, they’re unlikely to pay a premium.
It’s not that there isn’t value in Hadoop. There is, as Microsoft, Google (NASDAQ:GOOGL) and other cloud-based users have shown. The problem is that it’s those users that are getting the value of the code. Selling support around open source just isn’t a very good business. You must do something with the code, and sell that to extract its value.
The Bottom Line
After Oracle (NASDAQ:ORCL) bought Sun Microsystems in 2010, it fought a decade-long battle to close that company’s open source products like Java, and it won. Open source responded by moving control over important projects into independent foundations like Apache and Eclipse.
This turns out to be the right model, rather than the corporate support model pursued by Cloudera. The underlying code for Hadoop is protected by Apache, so even if Cloudera fails the code will keep providing value.
I love Cloudera, but I wouldn’t put a dime into CLDR stock. Open source is a development model, not a business model.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available 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 and IBM.
