A Big Play on Big Data

 | Feb 25, 2014 | 1:00 PM EST  | Comments
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We have been following Teradata (TDC) for the past year. In November, in fact, we included it in a group of stocks that might benefit from a year-end tax bounce. (It didn't.)

The company has an interesting valuation and outlook, and we believe that it has a great long-term franchise in "big data." However, it's important to recognize that there are more uncertainties than usual related to cloud computing and newer, lower-cost emerging technologies. The jury is still out on how this will eventually play out.

We have not stepped up to purchase the shares yet, but it is on a short list of stocks that we are watching carefully and we hope to start a position at a lower price. We believe it is an interesting and intriguing name for investors to get to know better.

Currently, Teradata is the leading data warehousing firm for data organization and analysis. The company has an industry leading market share above IBM (IBM), Oracle (ORCL) and EMC (EMC), and every year its products have been highly rated by the Gartner Group for data warehousing and analysis. The strong ratings continue into 2014.

Teradata sells proprietary hardware, software and services to the top 3,000 global corporations, governments and non-profit organizations to organize and analyze data. Once purchased by these entities, the hardware, software and services are rarely displaced by competitors due to the expense and complexity of replacing these products.

With the recent exponential rise of data generation from smartphones, tablets, sensors and social networking sites, demand for data organization and analysis is rising for Teradata. Many refer to this as the "big-data trend." Teradata will be one of the leading companies spearheading this upcoming revolution.

Over the past year, the company has stumbled as industry-wide information-technology spending slowed to 1% growth vs. a 3%-to-4% historical range. In addition to this macro-level slowdown, Teradata is also feeling pressure from emerging open-sourced and Web-based technologies such as Hadoop.   

Some speculate that Hadoop and other emerging technologies will outflank Teradata's prime position with its extensive client base because customers would like to save money by migrating to these cheaper technologies. Indeed, to date the company has experienced a slowdown in business as leading customers have tested such technology.

Still, Teradata's management believes this is just a short-term blip and that Hadoop will be additive to data analysis in the long run. Customers still need Teradata's broad-based solutions, data scientists and analytical models in order to accurately and efficiently analyze the upcoming big-data deluge.   

The jury is still out on the Hadoop and cloud risks, but we think they will be manageable.

Teradata shares are close to trough levels of valuation, and there is good upside potential from the current valuation level at 16x the 2014 earnings estimate of $2.85 per share. In addition, CEO Michael Koehler just stepped up and bought 10,000 shares at $41.30 apiece earlier this month. Beyond Teradata's stand-alone investment merits, we believe the firm could also be vulnerable to a strategic takeover by a larger technology company.

The shares are reasonable priced, and the company has a long history of industry dominance, profitability and success. We like the technology sector for the upcoming year, and believe Teradata may be a good holding in a basket of stocks in that sector for 2014. 

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