Teradata's Stock Drops Today for Unspecified Reasons
Teradata's shares, symbolized as TDC with a drop of 2.36%, plummeted by 13.3% during Tuesday's trading session, at 1:25 p.m. ET.
The decline in the stock value ensued following the release of Teradata's third-quarter earnings report. Although the company managed to surpass analyst predictions concerning both revenue and adjusted earnings per share (EPS), the forecast for the growth of its cloud business was relatively conservative.
Transition to cloud results in inconsistent data
For the third quarter, Teradata reported a revenue of $440 million, which remained nearly unchanged compared to the $438 million produced in the corresponding quarter of the previous year. The adjusted EPS also surpassed analyst predictions, reaching $0.69, opposite to the estimated $0.53.
It's essential to note that Teradata is undergoing a transformation from an on-premises, perpetual license business to a recurring cloud subscription-based business. Converting large, multi-year licenses for one-time use to recurring billings over time often results in a seemingly stable or even decreasing revenue.
This pattern is evident in Teradata's case as well. Even though the revenue remained steady, its public cloud annualized recurring revenue (ARR) increased by 26%. This aligns more with the growth trends typically observed in enterprise software-as-a-service businesses.
However, the issue arises when management predicted the growth of public cloud ARR to decelerate proportionally to 18% to 22% in the fourth quarter. During the earnings call, the executive team mentioned that customers are opting for a gradual transition from on-premises to cloud systems, resulting in extended migration cycles. As a result, the overall ARR projection for the year, including both on-premises and cloud, remains constant at a modest decline of 2% to 4%.
Teradata is not appealing in the short term
With shares currently trading at around 12.2 times the projected 2024 adjusted EPS, the company may come across as somewhat appealing due to its apparent low price. However, the challenging environment with limited growth prospects suggests a somewhat competitive market.
Given the potential in hybrid cloud data management, Teradata should be closely monitored. Investors might consider waiting to make any purchases until more clarity emerges in the upcoming quarters.
Despite surpassing revenue and EPS expectations, Teradata's conservative forecast for its cloud business growth might deter some investors interested in longer-term finance opportunities, as they may prefer companies with more robust growth projections in the field of investing money.
The company's transition to a recurring cloud subscription-based business model, coupled with extended migration cycles, could lead to inconsistent financial reports, potentially discouraging some investors who are focusing on short-term financial gains.
