The stock market got off to a quiet start to the new month on Tuesday, with investors sluggishly coming back to work after the Memorial Day holiday. As of 12:30 p.m. EDT, the Nasdaq Composite (NASDAQINDEX:^IXIC) had not only given up its gains from earlier in the session but was actually down about a tenth of a percent.
Cloud computing has been an extremely strong industry within the red-hot tech sector over the past year, and many investors have tried to find ways to take advantage of the trend toward digital transformation among major companies. Over the weekend, some institutional investors took matters into their own hands by making a deal to take a cloud computing specialist private, and that has some market participants looking at the cloud space as ripe for further consolidation and dealmaking.
Clear skies for Cloudera
Shares of Cloudera (NYSE:CLDR) were higher by 24% early Tuesday afternoon. Investors reacted to an offer that would put the cloud company into the hands of private investors.
Cloudera reported that KKR (NYSE:KKR) and Clayton, Dubilier & Rice have agreed to pay $5.3 billion to take Cloudera private in an all-cash transaction. The parties expect the deal to close in the second half of this year. Shareholders will receive $16 per share for their Cloudera stock, which is 24% higher than where the stock closed on Friday.
KKR and CD&R are excited at the prospect of bringing Cloudera private. Both private equity companies expressed their views that Cloudera would successfully execute on its long-term transformation strategy and make the most of its knowledge of data management and analytics.
The deal affirms that even cloud-focused companies that lose their growth momentum still have value in today’s market. Cloudera had massive growth of 65% in the fiscal year that ended in January 2020, but top-line gains slowed to just 9.5% last year. Moreover, Cloudera has consistently lost money and has gotten only marginally closer to breaking even over the years.
Putting a floor under soaring cloud stocks
Cloudera doesn’t trade on the Nasdaq, but a host of important data analytics players do. Zoom Video Communications (NASDAQ:ZM), CrowdStrike Holdings (NASDAQ:CRWD), Atlassian (NASDAQ:TEAM), and Okta (NASDAQ:OKTA) are just some of the biggest Nasdaq stocks that work primarily in the cloud, and they’ve all raised concerns from investors about just how high their valuations can go while remaining supported by their business prospects.
The fear some investors have is that if something happens to disturb the thus-far successful business model of cloud stocks, it could cause their valuations to plunge. Certainly, we’ve already seen some compressions in price-to-sales ratios in recent months, as even large cloud companies have struggled to keep up with stock market benchmarks hitting record highs.
However, the Cloudera deal is a reminder that cloud stocks are unlikely to become worthless or even close to worthless. Opportunistic institutional investors will see the long-term value of the assets they’ve cultivated, and that’ll put a floor under the share prices, which in turn could dispel fears and make share-price gains more likely.
Anything can happen to stock prices in the short run. When shares drop too far, though, it invites deals like the one that will take Cloudera private. That should give investors in high-growth, high-risk cloud stocks some comfort that even the worst-case scenario might not be as bad as they had feared.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.