The Uncommon Idea in Brief
Buy Hortonworks (HDP) stock for the long-term growth potential with the possibility of a shorter-term takeover. (Published Sept. 17, 2017)
– Build a long position on a breakout over $17.50 or a retest of $14.70. Add aggressively in the $12.50 to $14 range.
The Industry Opportunity
Hadoop Distributed File System and the Map Reduce framework, better known as Hadoop, is used across the infrastructure of web service providers like Facebook (FB), Google (GOOGL), and Yahoo to store and retrieve data.
As companies continue to adopt cloud computing, Hadoop is expected to generate strong growth. Hadoop is not only used by web service providers, but it is increasing in its commercial usage. And enterprise computing, as it is less costly than current technologies like data warehousing.
Zion Market Research estimated the Hadoop market at $7.7 billion for 2016 with an upside potential of $87 billion by 2022. This translates to an impressive compound annual growth of 50%. Allied Market Research offers similar estimates forecasting $84.6 billion in 2021.
What Does Hortonworks Do?
Hortonworks creates, distributes and supports data management software solutions built on open source technology. It delivers Hadoop technology programs for free and charges for support, education and professional services.
Its offering has traditionally been geared toward data scientists. Another product, MapReduce, has been used for batch processing of data. Also, Hortonworks created YARN, which is used within the platform for resource management and job scheduling. This allows multiple applications to run concurrently by distributing them across the cluster.
Since its inception on July 5, recommended stocks by Stirling Strategic Investor have returned 6.62% by Sept. 11 vs. the S&P return of 3.32%.
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The Uncommon Market Position That Sets Hortonworks Apart
Hortonworks announced Hortonworks Data Flow (HDF) for IBM Power Systems. HDF collects and processes purchase, sensor and asset data in real time and feeds it into customers’ “data lakes” or other streaming data applications. It is the only end-to-end platform that collects, curates, analyzes and can process data in real time from the point of origin through its entire life cycle.
Simply put, HDF is an application for “data in motion,” which is becoming especially relevant for the Internet of Things. Combined with IBM Power Systems, it enables customers to access performance and efficiency for streaming analytics. HDF is complementary to HDP and is designed to accelerate the flow of data in motion into HDP to support full fidelity analytics.
This quarter, eight of the 10 largest deals inked by Hortonworks included HDF, along with its core HDP product (for “data at rest”). Management was optimistic on the prospects for new applications that could be driven by HDF capabilities, calling it a “huge game-changer.” Management pointed to several use cases for HDF, including retail, manufacturing, insurance underwriting and utilities.
Hortonworks is also working will IBM to advance the develop of United Governance on the Apaches Atlas open platform. Atlas provides a scalable governance platform for Enterprise Hadoop, which is designed to help developers model new business processes and data assets quickly and easily.
In addition to Atlas, the companies will also partner on the advancement of Apache Spark, the open-source framework for processing and analyzing large data sets across clustered environments. With a cross into data governance, the increased focus on cybersecurity could spur growth quickly across the venture.
Financials – Hortonworks Still in Growth Mode
Hortonworks remains in its infancy of being a public company. It also remains in hyper-growth mode, which translates to large investments in research and development as well as sales.
These were the primary drivers behind the company reporting a $56.1 million loss in the second quarter on revenue of $61.8 million. Revenue is growing quickly coming in 42% higher year over year. Revenue was higher than the Wall Street consensus estimate of $57.4 million. And the loss of $0.44 per share was narrower than expectations of a $0.50 loss per share.
Subscription revenue maintained a path to achieve more than 50% growth for 2017. While not yet profitable, revenues and margins are trending in a positive direction for the company. Furthermore, the company closed the quarter with $71.8 million in cash, or roughly $1.04 a share.
Management anticipates third-quarter revenue of $63 million on negative operating margins of 39% to 43%, which exceeds current estimates of $60.5 million. Furthermore, full-year sales for 2017 are expected to be $247 million, also beating expectations of $239.5 million. Early projections for 2018 have HDP producing revenue a little more than $300 million.
Recent Analyst Coverage
Credit Suisse recently initiated coverage on Hortonworks with an Outperform rating and a price target of $20.
Analyst Brad Zelnick said the company is uniquely positioned in a larger under-penetrated market and holds an open-source advantage with it pure OSS model. The analyst expects that industry consolidation and partnerships favor the name.
Barclays raised its price target on Hortonworks to $20 from $16 while maintaining an Overweight rating after hosting Head of Corporate Development and Investor Relations Reuben Gallegos for investor meetings this past week.
Analyst Raimo Lenschow said they walked away from the meeting feeling positive on the company’s long-term market opportunity around Hadoop and on the company’s ability to grow revenues in full-year 2018 on the back of IBM partnership, GDPR regulation and introduction of a new front-end product.
The Technical Analysis – On a Breakout Over $17.50 or Pullback to $14.70, HDP is an Optimal Technical BUY. In the $12.50 to $14 it is an Aggressive Buy.
Hortonworks has only been public for two-and-a-half years, so technical discussion comes with the standard new issue disclosure, which simply means the amount of data and history available for analysis and pattern recognition is limited. Limited data equate to lower probabilities, but don’t render TA useless. Simply accept the technical picture with a grain of salt.
While 2017 has been a strong year for HDP, as shares have risen more than 100%, the first two years as a public company were challenging.
The stock fell from the upper 20s into the single digits in just over a year. After struggling for another year, HDP buyers finally found footing in the early half of 2017 and shares were able to break out in a big way in May. Recently, the move higher has shifted from a gradual horizontal move of higher highs and higher lows to a strong vertical push.
Our focus is on the rising support levels as they meet the newly-formed horizontal $17.50 resistance level although the larger pattern is a rising channel of higher highs and higher lows. Should the ascending support level at $16.25 fail to hold, we’d anticipate buyers coming into the stock between the 13-week simple moving average (SMA) and the 20-week SMA for a secondary support range of $14 to $14.70.
This setup provides two entry options: buy the breakout or buy a successful test of support. A weekly close over $17.50 appears as the most likely trigger, although shares appear buyable here without the trigger. Price resistance is somewhat soft as this pullback to support may simply be the pause that refreshes.
The overbought Stochastics appears in need of a pause. Buying the StochasticsRSI near zero has been a rewarding strategy and with the steep fall to 24 from 100 over the past few, HDP may hit the StochasticsRSI mark before the end of September. There is no short-term technical resistance level above $17.50 until we reach $25, our initial upside target with a 12-to18-month upside target of $26.
A secondary approach is to buy a successful test of $14.70 where the stock does not close under the $14 for consecutive weeks. This becomes range trade where you would expect the stock to move between $14 and $18 in a gentle rising fashion.
Catalysts for the Thoughtful Investor on Why Hortonworks Is a Buy
Recently, Hortonworks and IBM announced an expansion to their existing relationship, one to which investors should pay close attention. The focus is on extending data science and machine learning across the Apache Hadoop ecosystem. AI and machine learning continues to be a focus for Stirling as it promises to be a hotbed of growth and acquisition candidates.
The two companies are combing IBM’s BIG SQL and Hortonworks Data platform in an attempt to help users better analyze and more efficiently manage data-driven decisions. Hortonworks will continue providing support for the products they originate, but will expand its portfolio. Rather than only certifying IBM to resell a Big SQL HDP product, Hortonworks will have the ability to sell it as well.
Also, the companies will look to create a version of HDP paired with IBM’s DSX to allow Hortonworks adding data science and data warehouse optimization to its product mix. Lastly, it will expand their sales force without the need to hire more, so the company can focus on more targeted solutions as it moves toward becoming a platform provider both on and off the cloud rather than surviving on only Hadoop.
It’s important to note, none of this has factored into past financial results, nor is it heavily factored yet into projected results.
Now that IBM has folded its Hadoop offering to create and distribute its analytics and data science software on top of Hortonworks’ Data Platform offering enterprises a more packaged solution, Hortonworks finds itself working closely with IBM while maintaining a similar partnership with Microsoft’s (MSFT) Azure via HDInsight. This is a huge plus as it removes IBM as a potential competitor in the Hadoop space. Furthermore, the company recently licensed a specialized version of HDP to Amazon.com (AMZN) even though Amazon has its own Hadoop distribution called Elastic MapReduce.
While we don’t view Amazon as a potential buyer of Hortonworks, both IBM and Microsoft should be considered potential suitors.
The Bottom Line
1. Hortonworks creates, distributes and supports data management software solutions built on open source technology. It delivers Hadoop technology programs for free and charges for support, education and professional services.
2. Hortonwork’s expanded partnership with IBM expands both its footprint in the market as well as potential revenue streams. This partnership has not factored into already strong revenue growth and should provide a catalyst for HDP to exceed analysts’ revenue and earnings projections in 2018.
3. In the range of $14.70 to $16, we like HDP as a long-term buy and hold. Over $17.50, we like HDP as a momentum breakout long. The small-cap nature, short interest and new-issue status will make it volatile.
4. Hortonworks’ expanding partnership with IBM positions it as an ideal takeover target for IBM or fellow partner Microsoft, as both could vie for a stronger position in the fast-growing Hadoop and machine intelligence sectors.