From StockStory
3 Reasons to Sell TDC
Why Do We Think Teradata Will Underperform?
Despite the momentum, we don't have much confidence in Teradata. Here are three reasons there are better opportunities than TDC and a stock we'd rather own.
- Declining Billings Reflect Product and Sales Weakness
Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.
Teradata’s billings came in at $422 million in Q3, and it averaged 4.4% year-on-year declines over the last four quarters. This performance was underwhelming and shows the company faced challenges in acquiring and retaining customers. It also suggests there may be increasing competition or market saturation.
- Low Gross Margin Reveals Weak Structural Profitability
For software companies like Teradata, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.
Teradata’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 59.4% gross margin over the last year. That means Teradata paid its providers a lot of money ($40.58 for every $100 in revenue) to run its business.
The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Teradata has seen gross margins decline by 0.9 percentage points over the last 2 year, which is poor compared to software peers.
- Operating Margin in Limbo
While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.
Looking at the trend in its profitability, Teradata’s operating margin might fluctuated slightly but has generally stayed the same over the last two years. Shareholders will want to see Teradata grow its margin in the future. Its operating margin for the trailing 12 months was 11.5%.
Final Judgment
We cheer for all companies solving complex business issues, but in the case of Teradata, we’ll be cheering from the sidelines. Following the recent rally, the stock trades at 1.8× forward price-to-sales (or $30.54 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now.