Hashi Shares Up in Smoke

Shares of HashiCorp -- the cloud infrastructure software company referred to affectionately as "Hashi" by insiders -- have the crashies today, losing nearly 30% of their value after executives warned of rapidly slowing growth and announced a layoff of 8% of staff.

Just before market close, shares of Hashicorp were down $8.96 (26%) to $25.81. Hashi shares have lost 75% of their value since the company's initial public offering (IPO) in late 2021. It's a humbling position for the company that was long rumored to be an acquisition target for Cisco.

The HashiCorp crash reflects ongoing chaos in the cloud infrastructure space. Results lately have been schizophrenic. In many cases, macro growth in cloud infrastructure is down, though specific companies are being buoyed by excitement about spending on AI infrastructure. For example, NVIDIA shares have soared recently on expectations for AI, MongoDB shares soared, and code specialist GitLab printed 45% revenue growth. But networking results have been more uneven, including a flattish reaction to Cisco’s quarter.

Any way you look at it, the crash in HashiCorp hurts investors. It also represents disillusionment with technology IPOs after the deflation of the most recent boom. The HashiCorp IPO was long awaited, as the company was beloved by many Silicon Valley infrastructure insiders and investment banks. CEO Dave McJannet enjoys a sterling reputation in the valley. But so far, as a public investment, it’s been a miserable play. The once highly sought investment is now trading 80% below its all-time high of $97 in December of 2021, just after the IPO.

The Inside Dope on Hashi

Diving into the earnings, on the surface they looked okay. The company reported first quarter results that exceeded the company’s Wall St. guidance with revenue of $138 million, representing year-over-year (y/y) growth of 37% and improvements in profitability. CEO McJannet also said on the conference call the company added 32 new customers generating $100,000 or more in annual revenue.

McJannet said he was pleased with results but warned of a macro slowdown, which would drive big cost-saving measures at HashiCorp, including layoffs.

“Against a challenging environment, I'm pleased with the solid Q1 results that the team delivered,” said McJannet. “However, macro challenges continue to impact our business.”

Some more: "So while we're seeing heavy budget scrutiny on our large expansion deals, these entry-level deals with large companies give us confidence about the long-term shift to cloud and our role as the enabler of that transition."

So, what happened?

It was the forward guidance and layoffs that spooked the Street, as the company announced it was laying off 8% of staff to gird for the worst.

CFO Navam Welihinda sounded a lot more glum than CEO McJannet, painting the picture of a broad slowdown in the industry.

“We saw ongoing pressure on customer budgets, which caused slowdowns in customer behavior and elongation of sales cycles. While we have shown ongoing diligence in managing our expenses, we are operating in a very cautious customer spending environment,” said Welihinda. "As a result, we took additional steps today to reduce our cost structure through a reduction in force of approximately 8% of our workforce."

While some Wall St. analysts called it a buying opportunity and told investors it’s okay, the near-30% drop surely stung and introduced some credibility issues.

William Blair analyst Jason Ader, who has an outperform rating on Hashicorp, said the cost-cutting measures will set up for better success next year, as the company introduces operating leverage for the rebound:

“HashiCorp announced an 8% RIF, which will accelerate operating leverage and free cash flow," wrote Ader in an investment note. “Though the near-term outlook is disappointing, we believe management has now de-risked expectations for the year, with longer-term secular trends still intact and front-end activity still robust (pipeline, etc.).”

Futuriom's Take on HashiCorp

So what's in HashiCorp's future? Let's delve into this analyst's view.

The company has widely adopted hit products among cloud engineers -- Terraform for infrastructure-as-code management and Vault for data security -- but its other product lines seemingly have less traction. The company still hasn't shown the capability to translate its early success in Terraform into other product lines.

The bloom is definitely off the IPO rose, which represents a bit of a brand hit against a company with a reputation for being engineering driven and not strong in marketing. Maybe it needs a marketing overhaul? I did notice that it had one of the smaller booths at RSA -- compared to a larger garish booth from, say, CrowdStrike. Perhaps the company will have to pipe up a little more now to get attention? And HashiCorp is certainly quiet in this analyst's camp, declining to even give executive interviews.

The largest issue in the next few months will indeed be macro headwinds, but I expect HashiCorp will also see challenges from private companies in the shift left for networking.

One thing to watch out for: Hashi's share plunge makes it even more of an attractive acquisition candidate, especially to somebody like Cisco, whose shares have been relatively stable.