HashiCorp: IBM’s Big Deal? Cash In Now (NASDAQ:HCP)

Investment Thesis

HashiCorp, Inc.’s (NASDAQ:HCP) white knight was confirmed yesterday, in the form of International Business Machines Corporation (IBM) acquiring HCP for $35 per share in cash.

For investors who are deliberating what to do with HCP, I argue that investors would do well to cash out now. After all, HCP’s underlying prospects were mediocre, at best.

And there’s no telling how long it will take to complete this deal as it goes through different regulatory hurdles. The upside that is left in HCP stock is approximately 5%, which is a typical arbitrage spread.

Rapid Recap

Back in January, I said,

Part of the bull case on this stock is that it carries a significant amount of cash. More specifically, nearly 30% of its market is made up of cash and the business holds no debt.

But beyond HCP’s balance sheet, I don’t believe the remainder of its prospects are compelling enough to offer investors a positive risk-reward.

On the back of the recently confirmed acquisition, the stock is up significantly. Needless to say, in hindsight, this was the wrong call to make. But holding out for a potential acquisition would have been a long shot to incorporate into a bull thesis. So, what’s next?

HashiCorp’s Prospects Discussed

HashiCorp offers solutions for cloud infrastructure, assisting businesses in the management and automation of IT systems as they transition to cloud environments.

Their suite of products, highlighted by the HashiCorp Cloud Platform, aims to streamline the adoption of cloud technology for enterprises. HashiCorp’s emphasis lies in facilitating a seamless transition to the cloud for large-scale enterprises and will fit nicely in IBM’s Red Hat business unit as described by IBM’s press release,

HashiCorp’s capabilities to drive significant synergies across multiple strategic growth areas for IBM, including Red Hat, watsonx, data security, IT automation and Consulting.

HCP prioritizes simplifying their customers’ market approach and introduces cutting-edge features, such as AI integration within Terraform, to empower developers and optimize workflow automation.

In light of this background, let’s now discuss its fundamentals.

Revenue Growth Rates Are Expected To Decelerate Substantially

HCP’s growth rates were rapidly fizzling out. The graphic above demonstrates that if one were to expect HCP to not only match the high end of its guidance but actually beat the high end of its guidance, this business was only going to deliver around mid-teens revenue growth rates.

As far as tech companies go, investors are typically unwilling to pay a large premium for tech companies that are delivering decelerating revenue growth rates. It’s often the case that what appears cheap at first, goes on to become even cheaper with time.

Given that context, let’s now turn to discuss aspects of the bull case.

HCP Stock Valuation — Full Upside; $35 Per Share

HCP holds about 20% of its market cap as cash. For passive investors, such cash generally doesn’t have all that much significance because it boils down to how astutely and wisely management would have been above-average capital allocators. Meanwhile, for IBM, this obviously makes a significant difference and sweetens this deal considerably.

Moving on, HCP was guiding this year for approximately negative 7% non-GAAP operating margins. This was set to be a meaningful improvement from the negative 14% non-GAAP operating profits delivered last fiscal year, but hardly something that is enticing given that HCP’s growth rates were decelerating at such a rapid rate.

The Bottom Line

Given the recently confirmed acquisition of HashiCorp, Inc. by IBM, now is an opportune time for investors to cash out. With the acquisition offer standing at $35 per share in cash, this presents a solid opportunity to lock in gains, especially considering the mediocre prospects that HashiCorp had been facing.

Additionally, the completion of the deal could be subject to various regulatory hurdles, adding uncertainty to the timeline. Since there are right now so many investment opportunities available, holding out for this 5% upside doesn’t make sense.

Particularly as there’s always the possibility that the deal could end up falling through, however unlikely that outcome appears today.