- Splunk reported better than expected Q4 results.
- Stock dropped 15% in the previous quarter, creating an opportunity for investors.
- Investors can gain significantly in both short- and long-term.
The big data analytics company Splunk (NASDAQ:SPLK) reported record quarterly revenues of $147M in its fourth quarter, bringing its annual revenues to a record high of $451M. Splunk’s share price rose 7% following results which exceeded analysts’ expectations and the company’s guidance for revenues and EPS. Even though Splunk reported better than expected results with record high revenues, its shares plunged 16% in the three weeks following the earnings release, repeating the trend Splunk investors experienced in previous releases: sharp drops after extraordinary results.
In order to understand that phenomenon, it’s important to understand Splunk and its business environment. Splunk is a software developer; it develops analytics tools that allow corporations to index, analyze, and search machine-collected information based on their businesses. Splunk provides these organizations the ability to identify trends, highlight unusual transactions, and analyze customers’ usage. These unique insights can be used either for business purposes, e.g. to improve business processes and analyze customer satisfaction and marketing success, or for cybersecurity purposes, e.g. to protect a company’s IT infrastructure from hacks by translating the information in a secure context. As Splunk tools are considered big data analytics tools for enterprises, and as cyber security tools, the company’s stock is impacted by fluctuations in these two markets. The big data analytics market and cyber security are volatile and react sharply to new development. On top of these factors, Splunk is also a favorite short-term play by hedge-funds and substantial investors who use the sharp fluctuations in stock price for quick gain. Having said that, investing in Splunk is not just for the sophisticated funds, and fundamental investors may find value in Splunk for the long-term.
Splunk operates in two segments: the licenses segment, which includes revenues from the sales of licenses, to new and existing customers and the maintenance and services sector, which includes revenues from professional services, training, and maintenance for existing customers. Licenses revenues account for 66% of Splunk’s revenues and grew at an annual rate of 41%, while maintenance and services generates only 33% of the revenues but grew at an annual rate of 59%. As shown in chart 1 below, Splunk revenues grow at an incredible rate of 13% quarterly and a 47% yearly increase; 2015 revenues of $451M are seven times greater than the 2011 revenues.
Traditionally, Splunk offered Splunk Enterprise, which is the company’s most popular tool and provides an on-premise solution that enables large enterprises to collect and analyze machine-generated data on an enormous scale. For smaller enterprises that can’t maintain an onsite IT infrastructure or corporations that prefer a Software as a Service (SaaS) solution, Splunk offers Splunk Cloud, which has the same capabilities as Splunk Enterprise but on the cloud, and for even smaller organizations, Splunk provides a cost efficient solution in Splunk Light. As Hadoop is growing as the leading infrastructure framework, Splunk provides Splunk Hunk to analyze and visualize data in Hadoop (and NoSQL) data stores. Splunk is not only expanding its licenses' portfolio to match big data market development and clients' requirements, but also looking for new partnerships to improve its customers' output from Splunk tools.Today, Splunk partnerships include data visualization company Tableau (NYSE:DATA), application performance analytic company AppDynamics, and security company Symantec.
Splunk's innovative nature drives the company to look for new initiatives and partnerships to generate greater revenues. The new Cloud solution that offers a SaaS alternative for customers using the traditional Enterprise tool or new customers choosing an online tool instead of an onsite tool may cannibalize cloud enterprise sales in the short term. In the meantime, it seems that Splunk can manage that cannibalization by offering additional solutions to compensate for the revenue loss from the more profitable Enterprise tool.
Price and Valuation
After the recent decline, Splunk’s share price is $62, $18 lower than the analysts' one year average target price of $83. In the recent earnings release, Splunk provided guidance for 2016 (the year ends on January 31, 2016) revenues of $600M, $25M higher than the previous guidance and slightly lower than the analysts’ consensus of $603M. The company’s guidance and analysts' consensus for 2016 revenues reflects a possible upside of more than 25% based on a twelve months price target of $78 using a 16 P/S. My estimation of 2016 revenues is $620M, which is higher than the company’s guidance and analysts' consensus, and reflects a 30% upside with the same P/S ratio. In my estimation, I used Splunk’s historical revenue trend, quarter-over-quarter fluctuations, and conservative sales assumptions in both segments. Investors can use the post-earnings sell-off to increase their position in Splunk, assuming the stock price trend from recent earnings releases continues. For example, In Q3, Splunk also delivered better than expected results with record high revenues, and the company’s stock plunged 27% to a $51 low in January 2015. Investors who bought Splunk during the correction increased their return significantly after Q4 earnings when the stock rallied 40%. Repeating the same tactics again can offer a significant upside for investors in the short term, driven by the stock’s volatility while the company’s rapid growth suggests a significant upside for the long-term.
Big-data analytics company Splunk reported its fourth-quarter results at the end of February, revealing record-high revenues and EPS that beat analysts’ expectations and the company’s guidance. Splunk operates in a boiling technology sector, and its tools can be used for business intelligence as well as for cyber security. The company’s innovation and its constant search for new initiatives have helped it grow its revenues at the incredible quarterly pace of 13%, or 47% every year. Splunk’s share price is highly volatile, but investors who have confidence in the company and are not intimidated by the risk associated with it can gain significant returns both in the short and the long term.
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