Categorical data transformation and clustering techniques and systems are described for machine learning using natural language processing. These techniques and systems are configured to improve operation of a computing device to support efficient and accurate use of categorical data, which is not possible using conventional techniques. In an example, categorical data is received by a computing device that includes a categorical variable having a non-numerical data type for a number of classes. The categorical data is then converted into numerical data using natural language processing. Data is then generated by the computing device that includes a plurality of latent classes. This is performed by clustering the numerical data into a number of clusters that is smaller than the number of classes in the categorical data.