Breaking Down Friday's Big Data IPOs: Hortonworks and New Relic
Shriram Bhashyam | December 12, 2014
Editor's note: Today’s blog post is a guest contribution from Lior
Ronen, an equity analyst with Finro. The views reflected in this post are his and are not those of EquityZen. This post is for information purposes only and should not be regarded as investment advice or as an investment recommendation with respect to securities referenced herein.
(HDP) and New Relic (NEWR), two of the leading big data players, are going
public this Friday. Even though they both operate in the big data market, they
differ in their business model, segment of operation within the big data market
and financial profitability rates. But these two big data players have one
thing in common: they both priced their IPO lower than expected compared to the
share price of their last funding round as shown in chart 1 below.
and New Relic IPO underpricing are probably backed firmly by its principal
stockholders and underwriters who can benefit from that move. Underpricing
phenomena is nothing new and often used by underwriters to attract investors to
risky, less attractive investments that might suffer from smaller demands. IPO
underpricing often leads to the first-day rally that can end up with triple
figure upside. Big data analytics’ investors experienced it in Varonis’ and
Splunk’s IPOs that yielded more than 100% upside on their first trading day.
Looking at a wider range of previous SaaS or big data IPOs, they produced an
average upside of around 70% as shown in chart 2 below. These figures present
an opportunity in Friday’s IPO; however, which one of the two companies should
and New Relic offer two different investment alternatives to tech investors. Hortonworks enjoys the buzz of the emerging Hadoop market and provides a first glimpse at
it, attracting investors that are interested in the Hadoop business to its
market debut (other Hadoop companies are Cloudera and MapR, both still private). However, Hortonworks’ might
seem risky as it heavily depends on an open-source platform, has no proprietary
software licenses and relies on adjacent services. Barriers to entry are low,
and revenues may drop as competition increases due to the dependency it has on
professional services. New Relic operates under a known and proven business
model and sells licenses for its proprietary software. Users of big data
analytics tools may consider New Relic solutions better or worse than its
competitors but this is a problem that New Relic can solve by improving its
future products without the risk to adjust the business model as Hortonworks
may face in the future.
revenues from offering Hadoop-based solutions and professional services grow at
a quarterly rate of 15%; however total operating expenses are more than 3x of
its revenues. New Relic, on the other hand, has higher quarterly revenue growth
rate of 17% and better operating expenses to revenue ratio of 1.17. The
differences between the two company’s business models are highlighted in their
margins: Hortonworks has 25% gross margin and high triple-digit operating loss
margin while New Relic has an 80% gross margin 37% operating loss margin.
bullish market sentiment and downtrend in big data stocks year-to-date drove Hortonworks
and New Relic IPO prices below their last funding rounds’ prices. In addition,
each company has specific drivers behind its pricing strategy. New Relic priced
its IPO 28% below its series F stock price in order to attract investors who
look for a stable investment in a fast growing sector during this terrible
timing. Hortonworks priced its IPO 46% below its series D price (after a
reverse stock split) in order to attract investors who look for ultra-growth
stocks while relying on the recent buzz around the Hadoop market to drive stock
demand on Friday.
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