Breaking Down Friday's Big Data IPOs: Hortonworks and New Relic

Shriram Bhashyam
Dec 12th, 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.

Hortonworks (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.

Hortonworks 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 investors favor?

Hortonworks 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.

Hortonworks 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.

Current 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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