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We are bullish on Splunk (SPLK), as the company has shown impressive continuous double digit revenue growth in the last 19 quarters. In the latest quarter, the company was able to beat analyst estimates. The 71% rise in revenues came primarily because of the increase in number of customers. The company brought 400 more customers into its fold in the last quarter, causing its license revenue to considerably increase by 61%.

Despite the fact that the stock is trading at P/S of 21x, as compared to the industry average of 3.21x, the company's management is expecting positive operating income in the fourth quarter through high revenue growth. We can assume that this inorganic growth will be sustainable, as the recent development of Splunk Storm will further improve the company's profitability.

Splunk's core business is to establish software that help businesses collect, analyze, search and index data to bring operational and management efficiency. Its high capability software is designed with a data management facility and machine data engine to facilitate business intelligence and timely insights. The company has more than 4,400 customers in more than 80 countries. The businesses use Splunk's software to mitigate the security risk, enhance its service levels, improve operational efficiencies, create synergies and develop new products and services.

The recent development of the company's cloud service, called Splunk Storm, will further enrich its presence among corporate customers. The software is built for enterprises that run and establish applications in the public cloud, just like Google (GOOG)'s application engine. Splunk Storm will be beneficial for organizations in immediately identifying application problems, observing important business metrics, and getting insides from cloud computing to bring efficiency in its operations.

The company had a very successful IPO in April. It is still undergoing a lock up period, and we don't believe that prices are going to fall after this period, primarily because of the company's high growth prospects. The stock is currently trading at $38.3, which is 115% above its IPO issue price of $17. The company has raised $229.5 million in its IPO by issuing 13.6 million shares at $17 per share. It has generated more than its expectations.

The company is operating in a highly competitive software industry. Splunk is facing competition from BMC Software (BMC), International Business Machines Corp (IBM), Hewlett-Packard Company (HPQ), EMC Corporation (EMC), Google Inc. , SAP AG (SAP), Oracle Corporation (ORCL), Webtrends, Adobe Systems (ADBE), and Microsoft Corporation (MSFT). One of its main competitors, EMC, is diversifying its business into a security software business because of slow growth of the data storage business, in order to retain its high market value. In our view, we foresee that Splunk will be able to maintain the bond with customers, and its data management application software will ensure that the company will maintain its unique advantage. Financial Analysis

Direct Competitor Comparison

SPLK

EMC

NTAP

BRCD

ORCL

SAP

Gross Margin (TTM):

90%

62%

59%

61%

79%

72%

Operating Margin :

-9%

19%

11%

10%

38%

31%

The company's revenue has significantly increased by 71% to $44.5million over the last one year. It brought big names like Allianz Insurance, Orange France, Hughes Network Systems, Monster Worldwide (MWW), and many others, into its customer net. The license revenue of $30.2 million was raised by 61% YoY. Splunk's gross margin of 90% is far more than its peers in the industry, as depicted in the table given above. The company registered a net loss of $4.6 million, and out of this, $3.9 million was spent on stock-based compensation. The reason behind this non-cash expense was to increase employees' stake in the company in a bid to motivate them towards organizational priorities. The company's operating cash flows are $3.8 million, while its free cash flows are $2.2 million. By excluding onetime line item expenses, the loss is only of one cent per share. Due to the company's conspicuous research and development spending, and sales strategy, its maintenance revenue increased by 99% in the second quarter.

The stock showed an upward spiral of 30% in the last three months. In comparison, its peers have followed the same trend, as is reflected in the above graph. Brocade Communications Systems (BRCD) posted the same upside of 30% as SPLK, whereas NetApp (NTAP), Oracle Corporation and SAP AG registered upsides between 15% and 20%. The stock's 50-day and 200-day moving averages are $29.7 and $30.7, respectively. The stock is currently trading near its 52-week highs, and has substantial potential to show an upward trend.

Valuation

Direct Competitor Comparison

SPLK

EMC

NTAP

BRCD

ORCL

SAP

EPS :

($0.01)

$1.21

$1.42

$0.29

$1.96

$3.75

P/S :

21.06x

2.63x

2.01x

1.2x

4.1x

4x

The stock is currently trading at P/S of 21.06x, at a significant premium when compared to EMC's 2.63x, NTAP's 2.01x, BRCD's 1.2x, ORCL's 4.1x, and SAP's 4x. According to the estimates of 12 analysts, its earnings will increase by 200% by the end of next quarter.

We can forecast that the company can sustain its advantage of growing customer needs of business intelligence and cloud computing. We believe that customer growth will continue, with the rising businesses demand for securitized data management. Existing customers can expand the usage of the company's products to other departments as well. In the long run, we believe that growth will come from new product development, and the company's first mover advantage in data management, which will be sustained. The company has the potential to maintain its strong position through its aggressive product and application development in this space, which is why we are bullish on the stock.

Source: Splunk Has Doubled Since Its IPO, Valuations Are Expensive But Justified By High Growth