On Tuesday, Morgan Stanley (NYSE:MS) adjusted its stance on Teradata Corporation (NYSE:TDC), downgrading the stock from Overweight to Equal-weight and slashing the price target to $48 from the previous $74. The revision follows Teradata's latest financial performance and outlook, indicating a slower growth trajectory for the company in the coming year.
The downgrade was prompted by a combination of factors impacting Teradata's revenue acceleration and valuation multiples. According to the firm's analysis, Teradata is encountering unforeseen challenges, including extended timelines for Cloud deals and a decline in on-premise business, which are likely to restrict revenue growth and limit the stock's potential for multiple expansion in 2024.
In the fourth quarter, Teradata reported revenue and earnings per share that slightly exceeded Morgan Stanley's expectations by 1% and 4 cents, respectively. However, the company's Cloud Annual Recurring Revenue (ARR) grew by 46% year-over-year on a constant currency basis, missing the projected guidance range of 53-57%. This miss was attributed to several deals being postponed into 2024. Additionally, two significant on-premise business erosions are anticipated to create headwinds for both ARR and recurring revenue in 2024, leading management to forecast a slowdown in growth for the year and a heavier emphasis on the latter half.
Morgan Stanley expressed concern regarding the 2024 Cloud ARR guidance, suggesting that management's target of $1 billion by 2025 now appears more ambitious. The firm also noted the deceleration of revenue growth in 2024 as a cause for concern. The price target reduction of 35% to $48 is primarily the result of lowering the valuation multiple on Teradata's Cloud ARR business to reflect the anticipated slower growth.
InvestingPro Insights
In light of Morgan Stanley's recent downgrade of Teradata Corporation (NYSE:TDC), investors may find the following insights from InvestingPro particularly valuable. Teradata's management has been actively repurchasing shares, a move often interpreted as a sign of confidence in the company's future and valuation. This aligns with one of the InvestingPro Tips, which highlights the company's aggressive share buyback strategy.
Another relevant InvestingPro Tip for Teradata is the company's high shareholder yield, which could be an attractive point for investors seeking companies with a strong commitment to returning value to shareholders. Although Teradata does not pay a dividend, its share repurchases contribute to shareholder yield.
From the InvestingPro real-time data, Teradata's market capitalization currently stands at $3.69 billion. The company is trading at a high earnings multiple, with a P/E ratio of 60.84 and an adjusted P/E ratio for the last twelve months as of Q4 2023 at 76.96. This data suggests that the market has high expectations for Teradata's earnings growth, despite the recent concerns raised by Morgan Stanley.
Teradata's revenue for the last twelve months as of Q4 2023 was $1.833 billion, with a growth rate of 2.12%. This modest growth rate may reflect some of the challenges that Morgan Stanley has identified in its report.
Investors interested in further insights can find additional InvestingPro Tips for Teradata, including expectations for net income growth this year and recent analyst earnings revisions, by visiting https://www.investing.com/pro/TDC. There are 9 more tips available on InvestingPro that could provide a deeper understanding of Teradata's financial health and future expectations. Remember to use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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