Susquehanna Predicted 70% Downside In Hortonworks Last Year...But Now It's Upgrading The Stock

Susquehanna’s Derrick J. Wood upgraded Hortonworks Inc HDP from Negative to Neutral, citing valuation. He reduced the price target from $17 to $9.

The analyst said that the fundamental concerns surrounding Hortonworks’ business model remain, as also the “general uncertainty of adoption and competition in the Hadoop market” in the near-term. However, the company’s stock valuation already discounts most of these risks, with shares having tumbled more than 70 percent from the year-ago levels.

After Hortonworks’ 4Q billings missed expectation, a couple of “incrementally positive developments” had taken place, Wood commented. He enumerated them as:

1. The company had raised equity worth ~$90 mln, which helped improve its cash position for the next 12-24 months
2. The company now seems more focused on cost controls

In the report Susquehanna noted, “HDP is still expected to generate a $55 mln loss in Adjusted EBITDA in FY16, and our model calls for an ~$80 mln FCF burn. In turn, there was no explanation around the sharp slowdown in new customers in the quarter, which leaves some outstanding questions (which we speculate about below).”

Wood further wrote that while near-term downside is limited, the combination of a high cash burn profile, along with the significant uncertainty related to how the market would evolve, would keep Hortonworks’ shares at low levels.