Is Improving IT Demand Enough To Maintain Teradata's Rebound?

By Stephen D. Simpson, CFA | August 26, 2013 AAA

The rise and fall of Teradata (NYSE:TDC) over the past two years is a good lesson in the pitfalls of theme investing in tech. Teradata enjoyed a great run on the back of “Big Data” hype and shares of this data analytics company definitely overshot fair value. Once IT budgets came under pressure, though, Teradata's reported results showed just how sensitive the company remains to on-the-ground IT demand. While the shares have bounced off their 52-week lows and the company is a credible player in an important market (the collection and analysis of enterprise data), it's hard to call this stock a bargain today. Can Teradata Stay Ahead Of The Crowd?On the whole, competing with companies like IBM (NYSE:IBM), Oracle (Nasdaq:ORCL), and EMC (NYSE:EMC) is not a particularly pleasant task. Teradata does boast a suite of scalable and comprehensive solutions to aggregate, integrate, and analyze enterprise data, and the company does have strong capabilities in unstructured data – data that can be very valuable for marketing purposes, but that don't necessarily fit well with prior database systems. SEE: A Primer On The Tech Industry One of the advantages to the Teradata approach is that it has historically focused on very complex and demanding apps, or high-end data warehousing solutions. By comparison, the products and solutions offered by IBM, Oracle, EMC, and Hewlett-Packard (NYSE:HPQ) have generally been targeted at less demanding situations. More recently, though, Teradata's competitors have closed the gap with what their approaches can achieve. At the same time, while Teradata has looked to develop more products for the mid-market, I'm not convinced that Teradata can be as competitive selling “lower horsepower” products. Stickiness HelpsOne of the major advantages to the Teradata approach is that its solutions are mission-critical to many of its customers, as well as highly complex. That creates very high switching costs and makes Teradata's customer base very sticky. While Teradata customers may buy a database product from IBM, Oracle, Microsoft (Nasdaq:MSFT), or SAP (NYSE:SAP) for a particular application, more often than not that data still ends up feeding into the preexisting Teradata data warehouse. At a minimum, this stickiness creates a high barrier of proof for new entrants/competitors. Not only do sales reps from IBM or Oracle have to convince Teradata customers that their approaches are superior, but they also have to make the case that all of the switching costs, hassles, and risks are worthwhile, and that's a tough hurdle to surmount. So while it may be true that Teradata's rivals have closed the gap with their products, they often have to clearly (if not dramatically) superior to motivate or justify a wholesale switchover.SEE: The Big Play In Big Data Is Big Data Really A Big Deal?One of the issues I see with the bullish thesis on Teradata is the true value of “Big Data” to enterprises. I don't dispute the idea that companies like Wal-Mart (NYSE:WMT), eBay (Nasdaq:EBAY), and Facebook (NYSE:FB) generate tremendous data volumes on a day to day basis, and that there is real value in aggregating and analyzing this data. I likewise don't dispute that Teradata's analytics capabilities are very strong. Where I dispute the bull case is in how all of this translates into real demand and non-cyclical growth potential. The last few quarters of performance from Teradata would suggest that its products and services are just as vulnerable to the cyclical expansion and shrinkage of IT budgets as any other IT products, and that doesn't really argue for the case that “Big Data” is a powerful independent demand driver. The Bottom LineThere still seems to be quite a lot of optimism factored into these shares. Long-term revenue growth of 7% and free cash flow growth of 11% is good for a fair value in the mid-$60s, and that's not a compelling target relative to today's price. Moreover, those growth rates are predicated on some of the more bullish forecasts on the Street. In other words, as is often the case on Wall Street, sell-side analysts may be bullish on the near-term growth prospects for Teradata, but their own models really don't argue for exceptional long-term value creation. I'm the first to admit that “long-term value creation” is not a pressing factor in how many tech stocks trade. Should IT budgets recover in the second half of 2013 and start driving a return to good revenue growth at Teradata, the stock could easily move back into the $70s. But while that could be a good trading opportunity for more aggressive investors, the long-term potential for Teradata seems more limited and those aggressive investors shouldn't forget to take their profits when the time comes. Disclosure – At the time of writing, the author owned shares of EMC. 

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