Why activist investor Carl Icahn is taking a big stake in 11-year-old 'big data' company Cloudera

Key Points
  • Cloudera shares spiked after the company disclosed that Carl Icahn had taken an ownership stake.
  • Icahn has made it clear that the company's shares are undervalued.
  • A leadership change and greater competition have hurt the stock in recent months.
Carl Icahn speaking at Delivering Alpha in New York on Sept. 13, 2016.
David A. Grogan | CNBC

The latest target of Carl Icahn, an investor famous for his activist-takeover campaigns, is Cloudera, a troubled enterprise-software company that recently combined with its biggest rival.

Icahn has taken aim at a company that's not nearly as richly valued as other technology names. Cloudera's market cap is less than $2 billion, and it had a price-to-sales multiple of 2.6 for its current fiscal year, according to Refinitiv, while comparable small-cap enterprise software companies MongoDB and Twilio boast multiples of 16.4 and 14.5 respectively.

Cloudera is available at a discount for a few reasons: The person who took it public has left, and big cloud companies like Amazon are picking up business on Cloudera's turf.

Cloudera shares rose after Icahn's position in Cloudera became public on Aug. 1. "The Reporting Persons acquired their positions in the Shares in the belief that the Shares were undervalued," Icahn and Co. wrote in the regulatory filing revealing the ownership stake.

On Monday the company said that as a result of an agreement with Icahn, two employees of Icahn Enterprises, Nicholas Graziano and Jesse Lynn, will join Cloudera's board. Icahn and his affiliates now own more than 18% of the company, whose market cap is below $2 billion.

Cloudera declined comment. Icahn could not immediately be reached for comment.

Nothing to break up

Founded in 2008, Cloudera sells software that companies use to store and process great quantities of different kinds of data, sometimes referred to as "big data." It's best known for popularizing the Hadoop open-source big data software, which was inspired by technology used at Google and put into widespread use by Yahoo. The company went public in 2017 with considerable backing from Intel.

For years, Cloudera competed with other companies selling distributions of Hadoop, including Hortonworks. Then Cloudera and Hortonworks merged in a deal that was originally valued at more than $5 billion. The two companies' stocks didn't react well to the news, though. As they worked on integrating, Cloudera saw public cloud vendors pick up some of its sales opportunities, said then-CEO Tom Reilly on an earnings call in June. (Reilly has since left, and Chairman Martin Cole is now the company's interim CEO.)

Analysts have varying opinions on what Icahn is likely to do.

"Cloudera is a pure-play single platform company and there's nothing to breakup, so we'd imagine that the compatible areas of Mr. Icahn's historical playbook would be restricted to 1) agitating for a sale, or 2) pushing for big expense reductions to boost cashflows," BTIG analysts led by Edward Parker wrote in a note distributed to clients after the Cloudera stake was disclosed.

"The prospect for the latter's success is complicated by the fact that the stickiness of Cloudera's current revenue stream is currently subject to a high degree of skepticism. Indeed, Cloudera's future largely hinges on the success of the upcoming CDP [Cloudera Data Platform] release, which pivots the company's big data management platform from on-prem towards hybrid and multi-cloud environments."

Rishi Jaluria, senior research analyst at DA Davidson, believes the company is undervalued.

"While the involvement of Mr. Icahn is a surprise, the involvement of an activist is not – we do believe shares are currently undervalued and the company could benefit from an activist," he wrote in an Aug. 2 note. With Icahn in the mix, he could contribute to the selection of a replacement for Reilly, or agitate to sell the company to IBM or a private equity buyer.

The consolidation in the industry underscores the difficulty of building strong sustainable businesses selling open-source software. Earlier this month Hewlett Packard Enterprise said it acquired the "business assets" of a smaller Hadoop player, MapR. HPE didn't disclose terms of the deal.

Icahn is no stranger to technology investing. After investing in Lyft in 2015, he exited the position earlier this year, prior to the company's initial public offering. Last year he exited a position in PayPal, acquired a stake in VMware and bought into the tracking stock for Dell as the company was plotting its return to public markets. Icahn has also backed Apple and Netflix.

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