Teradata trades at $32.43 per share and has stayed right on track with the overall market, gaining 13.2% over the last six months. At the same time, the S&P 500 has returned 9.8%.
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Why Do We Think Teradata Will Underperform?
We’re cautious about Teradata. Here are three reasons we avoid TDC, plus one stock we’d rather own.
1. Weak Billings Point to Soft Demand
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 $515 million in Q1, and over the last four quarters, its year-on-year growth averaged 3.7%. This performance was underwhelming and suggests that increasing competition is causing challenges in acquiring/retaining customers. 
2. Shrinking Operating Margin
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 decreased by 7.2 percentage points over the last two years. Even though its historical margin was healthy, shareholders will want to see Teradata become more profitable in the future. Its operating margin for the trailing 12 months was 6.1%.
3. Cash Flow Margin Set to Decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Teradata’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 39.6% for the last 12 months will decrease to 18.6%.
Final Judgment
We see the value of companies addressing major business pain points, but in the case of Teradata, we’re out. That said, the stock currently trades at 1.9× forward price-to-sales (or $32.43 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. We’d suggest looking at one of our top digital advertising picks.
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