Now that Demandware (NYSE: DWRE) went public – and its IPO rallied out of the gate like I predicted – it’s time find a replacement for the company on our “Hot IPO Watch List.” Thankfully, it didn’t take me long.
As you’re well aware, my passion and research focus lies with up-and-coming technology companies. And I’ve found another compelling tech IPO to consider.
Which really shouldn’t come as a surprise. Tech companies are dominating the IPO market this year. Counting this week’s expected activity, 10 out of the 28 IPOs in 2012 have been technology companies. That works out to 40% of the deal flow – well above the 10-year average of 23.4%, based on Renaissance Capital data.
The good news about the technology company I’ve found is that it’s capitalizing on one of the most compelling growth trends in the market. Specifically, the exploding amount of data we create as a society, which I alerted you to in early December.
Recall that the amount of data we create is expected to double every 18 months. Here’s the thing – businesses aren’t just looking for smarter ways to store it. They’re also looking for smarter ways to analyze it.
So much so, that the McKinsey Global Institute pegged big data as “the next frontier for innovation, competition and productivity.”
And that’s where Splunk (NASDAQ:SPLK) comes in…
All the Hallmarks of a Hot IPO
In early January, the San Francisco-based company officially filed plans to raise up to $125 million in an initial public offering. The move marks the culmination of a year’s worth of speculation about an IPO. During which time, Oracle (Nasdaq: ORCL) and Dell (Nasdaq: DELL) were both reportedly trying to buy the company outright.
Clearly, this isn’t just any tech IPO. Splunk’s products are in high-demand. Both customers and technology heavyweights are looking to increase their own profitability via acquisitions. And for good reason…
Splunk’s software provides companies with real-time business intelligence. And it does so by collecting a company’s data and indexing it on a massive scale, regardless of format or source. Its technology allows companies to search, correlate, analyze, monitor and run reports on this data. All in real time.
As one insider put it, Splunk is the Google (Nasdaq: GOOG) for the world of machine language. And much like Google’s interface, you don’t need to be a data geek to use Splunk’s software.
As Splunk states in its S-1 filing, “Users can simply download and install the software, typically in a matter of hours, to connect to their relevant machine data sources and begin realizing operational intelligence.”
Or as GigaOm’s Barb Darrow says, “A mere mortal – not a data scientist – can work with Splunk to put that data into an easily understood visual format.”
No wonder most Fortune 100 companies are among the company’s 3,300 customers.
But please don’t let an already impressive and expansive client list mislead you into thinking the company’s best growth is behind it. Far from it.
- In the last nine months, Splunk’s sales increased 78.9% to roughly $78 million. Yet Gartner estimates that Splunk’s products serve a market worth $32 billion. So we’re talking about a market penetration of less than one-half of 1%.
- Research firm, IDC, estimates that the volume of digital information created worldwide is going to grow by about 45% annually. From 1.8 trillion gigabytes in 2011 to 7.9 trillion gigabytes in 2015.
Add it all up and Splunk’s definitely capitalizing on a verifiable growth opportunity – one with serious legs. Which, as you know, is one of my five hallmarks of a hot IPO.
Now let’s evaluate the company based on my other criteria…
- Age: The older and more established a company is when it goes public, the better the stock tends to perform. Founded in 2003, Splunk’s been around long enough to demonstrate viability. That’s not something you could say about most IPOs during the dot-com collapse. The average IPO back then hit the public market at just four to five years of age.
- Revenue: In another sign of its maturity, Splunk already boasts over $75 million in sales. Research from University of Florida professor, Jay Ritter, shows that companies with more than $50 million in sales at the time of their IPO significantly outperform companies with less than $50 million in sales.
- Profitability: As I’ve said countless times before, share prices ultimately follow earnings. So we’d be wise to stick to IPOs that are already profitable or about to turn the corner on profitability. And Splunk is definitely on the right track. Full-year losses narrowed from $1.14 per share in fiscal 2009 to $0.21 in fiscal 2011.
Before the company finally goes public I expect it to release fiscal 2012 numbers. So we’ll want to make sure the numbers still point to imminent profitability.
The last criterion to consider, of course, is valuation. But we’ll have to wait until Splunk finalizes its IPO plans before we can determine whether the price is right.