Informatica: Significant Upside Potential

Stock Market

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We find it surprising that Informatica’s (NYSE:INFA) story is still not understood by the markets despite remaining a leader in multiple data-management related areas.

fiscal guide

Company filings

The only possible reason for the stock price to lag is the lack of a large subscription revenue base, which appears to be changing.

lt model

Company filings

Along with the growth in cloud revenue, we expect Informatica’s free cash flows to significantly expand (even ahead of what the management is projecting), making the stock a multi-bagger.

A bit of history

Informatica was a publicly-traded company before going private in 2015, with CPPIB as a significant shareholder (who continues to date). At the time, the concepts of cloud and subscription were gaining traction amongst the investor community. Along with the Canadian Pension giant (CPPIB), Microsoft and Salesforce had also invested in Informatica, possibly trying to stay ahead in the data-driven world.

The erstwhile board had backed the $5.3 billion deal, which was expected to allow Informatica to experiment with its technology stack without coming under the glare of the markets.

Informatica relisted on NYSE in October last year, reaching a peak valuation of over $10.7 billion in December 2021 and currently is around $6 billion.

Business model

Informatica has been a long-standing leader in the enterprise data space.

gartner mq

Company filings, Gartner

The company has been a pioneer in big data and has adapted its technologies to create IDMC, or the Intelligent Data Management Cloud.

idmc

Company filings

IDMC helps collate, curate and correlate data across an organization’s data assets. This data and analysis can then be used to manage user experiences, develop automation strategies, and build out analytics to infer behavioural trends better. This strategy is similar to that of Adobe’s:

Adobe was collecting user behaviour data of paying customers to understand their needs and building an analytical engine on top to help serve more, all with the knowledge of employers and while complying with every data and privacy law there exists.

Source: Adobe: Do Not Mistake This Cash Flow King To Be A Fallen Star

Notably, when Informatica had gone private, Bruce Chizen, former CEO of Adobe, had joined its board.

We further note, from Informatica’s filings:

The growth and adoption of our cloud platform has led to the number of cloud transactions on our platform, which is a measure of data processed, increasing from 0.2 trillion per month in 2015, to 16.9 trillion per month in 2020 and to 27.8 trillion per month as of December 31, 2021.

Source: 10K

To leverage these transactions, at the heart of the IDMC sits Claire or Informatica’s artificial intelligence engine.

working

Company presentation

Our cloud-native platform leverages over 50,000 metadata-aware connections that continuously scan our customers’ data to create rich and highly contextualized metadata to create and manage a metadata system of record that acts as a single source of truth about their data. This allows our AI engine, CLAIRE, to help customers access better data faster, make contextual recommendations about data relationships, uncover novel insights about their business and automate previously manual tasks. As more customers adopt our platform, CLAIRE continuously analyzes new transactions, configurations, rules, and decisions and uses this increased intelligence to drive further automation and deliver better insights to our customers, which in turn we believe will continue to accelerate the adoption of our platform.

Source: 10K

The IDMC leads to a simple bifurcation of revenues: subscription (cloud), non-subscription (software, but non-cloud) and support.

The Company derives its revenue from sales of 1) cloud subscriptions, representing access to the Company’s software via Company hosted cloud applications, 2) on-premises subscription licenses, representing a term license to on-premises software, 3) subscription support, representing support for on-premises subscription licenses, 4) perpetual software licenses, and 5) maintenance and professional services, consisting of maintenance on perpetual software licenses, and professional services, consisting of consulting and education services.

Source: 10K

cloud rev

Company filings, Author’s analysis

on prem rev

Company filings, Author’s analysis

total sw rev

Company filings, Author’s analysis

While cloud software should continue to grow on increasing transactions, non-cloud (on-prem) revenues will soon be subsumed in the subscription business model.

total rev break up

Company filings, Author’s analysis

Non-software revenue has been on a downward trajectory and is expected to decline further. The fall in professional and services revenue is a planned move, occurring due to Informatica’s growing cloud focus (and thus ARR).

Financials

We focus on the transaction volumes data provided by the company and, based on non-linear regression, have triangulated how the transaction volumes would have approximately grown over the last few years. Then, we use this trend to project the growth in the future (we could be significantly conservative here, given that the transaction volumes should grow even faster given the large volume of data the company manages).

tx vol growth

Company filings, Author’s analysis

Using this data, we arrive at the expected pricing per transaction of cloud revenue.

pricing growth

Company filings, Author’s analysis

Despite expectations of pricing continuing to remain weak, the volume growth should give a significant impetus to cloud revenues.

cloud rev growth

Company filings, Author’s analysis

As the high-margin cloud revenue begins to dictate the trajectory of the overall revenues, we think FCF should also see a similar growth trend.

fcf and rev

Company filings, Author’s analysis

Informatica’s 2022 free cash flows make it relatively cheap at 18x. Looking out to 2023, the company trades at an inexpensive P/FCF of 10x.

Chart

Risks

Informatica’s business can be considered a ‘utility-type’ business in the tech space, given the data-centricity in the business model. While most of the cloud plays are at the application layer and the hyperscalers, Informatica is one of the few at the data layer.

The major risks that we envisage are:

  • Challenges in execution: The transition to a subscription model requires significant effort, although much lower than what was needed a decade back. Nevertheless, since it is a critical component of our thesis, it is worth highlighting as a potential risk.
  • Competition: In addition to specialized vendors, most of Informatica’s partners also compete with the company. While the market for Informatica is relatively large, some of the hyperscalers are known to be a bit overzealous.
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Company presentation

  • Local data regulations: The force driving Informatica’s engine is data, which can potentially reduce the effectiveness of the company’s AI offerings if restricted by geography.

Conclusion

Considering Informatica’s integrations with the hyperscalers, we think a re-rating in the company’s valuation is imminent. In addition, Informatica’s industry leadership in deep data management capabilities and strong institutional backing (CPPIB still holds c.30%) will further help sustain and build upon the valuation re-rating. As a result, we think the stock is significantly undervalued and can become one of the best picks for 2022.

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