Teradata (TDC -1.01%) stock tumbled in early trading Friday, hurt by a new sell rating from a UBS analyst who warned that customers are preparing to abandon the cloud-based enterprise analytics company.
As of 12:30 p.m. ET, Teradata stock was already down roughly 8%.
Why UBS is worried about Teradata
Teradata has told investors that it expects to generate $1 billion in annual recurring revenue from its public cloud business in 2025 (cloud ARR was $528 million last year and up 10 times in four years), and $450 million in positive free cash flow. But according to UBS analyst Austin Dietz, these numbers are at risk. Customer checks among Teradata's clients show that 6 out of 7 customers surveyed "are migrating off Teradata in the next 6-24+ months," writes Dietz in a note covered on StreetInsider.com today.
This throws into question Teradata's ability to maintain the recurring revenue it's promising, and Dietz is forecasting Teradata will miss both of those targets, generating just $935 million in cloud ARR and $405 million in free cash flow. That's the short-term risk. Longer-term, Dietz says customers seem to be seeking a more "open data lake" solution "that could materially disrupt Teradata's existing data warehouse market."
Is Teradata stock a sell?
How big a risk is this for Teradata investors? On one hand, the stock looks expensive, trading north of 80 times earnings. On the other hand, valued on its free cash flow, Teradata shares look quite inexpensive -- trading at just 7.4 times its expected 2025 FCF and a still-cheap multiple of 8.2 even if UBS' survey is right.
That being said, even this cheap valuation may not entice growth investors to buy if their fear is that customer defections will cause growth to slow or reverse. Right now, most analysts are expecting Teradata to maintain a long-term earnings growth rate near 13%.
If that prediction holds up -- well and good. But if the company's growth story falls apart, Teradata stock could be in trouble -- no matter how cheap the valuation seems today.
