On Monday, hedge fund manager Zach Buckley of Buckley Capital presented a very bearish report on Splunk (SPLK) at the Value Investors Congress. He said SPLK is a one-product company and only worth $6-$12 per share based on its free cash flow valuation. While the stock currently trades at around $35 and the company is still growing, I believe Buckley's valuation is especially pessimistic, but possible.
What Splunk's sole product does is accumulate a company's data on the cloud and analyze it for customers. Unfortunately for Splunk, there are other bigger companies that are moving into the space. Oracle (ORCL) is one of those companies that will heavily challenge Splunk. Oracle recently announced that it will jump full force into the cloud space. Its Enterprise Resource Planning (ERP) software, and data mining application directly challenges Splunk's service. Just today, Lending Club hired Oracle for its ERP software when it could've hired Splunk.
"Market and macroeconomic factors could interfere with this price target, as could a slowdown in technology spending, increased competition from IBM, Oracle, SAP (SAP) and others, or a reversal in recent focus on bottom-line results by management," Pacific Crest Analyst Jesse Hulsing wrote.
If Splunk reports guidance below expectations on its next earnings report, it could cause a huge fall of 10-30%. That's after the stock could experience a pullback leading up to and after its upcoming stock lockup expiration.
On October 15th, 31 million new shares of SPLK will be available for sale by insiders. In my opinion, investors can expect the majority of those shares to be sold. On July 24th, executives sold approximately 17 million shares of SPLK at $28.26 per share to investors. That was a planned sale and is evidence that insiders are looking forward to cashing in their chips. On October 15th, employees will sell their shares on the open market, which will have a more detrimental effect on the share price.
Reading Splunk reviews on glassdoor.com, gives some clues about the mentality of Splunk employees. Although there are only ten reviews, (Splunk has about 460 employees) I believe they are genuine and likely reflect the views of at least a portion of Splunk's workforce. It might even represent the views of Splunk's executives. One current employee said on June 25th:
Before the IPO the company was abuzz with exciting projects and an adventure mood, but now people are just waiting to cash out. Feels like those who could, left and didn't look back.
When looking at Splunk's reviews on glassdoor.com as a whole, it seems to be consistent with the above quote. The oldest few quotes that were pre-IPO describe the company as "innovative", "a blast", and "a great place to work". The latest few quotes are more about executives looking to cash out and the company having low morale.
Like I said, this small sample size of employee reviews could be much different than the company as a whole. But if it's the true mentality of the employees, then the stock is in trouble. If the company's executives are just looking to cash out and move on, then Splunk could go the same route as Zynga. Soon after ZNGA crashed last quarter with disappointing revenues and profits, many executives left. Did Zynga's bad performance cause the executives to lose their enthusiasm in the company, or was it the other way around?
One Product Companies Are Very Risky
Green Mountain (GMCR), Questcor (QCOR), Research In Motion (RIMM), Pandora (P), Zynga (ZNGA), and Netflix (NFLX) are all examples of companies with one product that at one point had parabolic valuations as a result of their amazing revenue growth. However, they all ended up falling 60% or more once their one product got challenged.
The problem with companies that are very successful off of just one product is the more profitable the product, the more imitators will enter the field and the companies' partners want a bigger cut. This decreases margins. Without constant innovation, the original company can find profits elusive, and growth strained. Furthermore, if Splunk employees are losing their enthusiasm and are just looking to cash out, the company's performance is bound to get worse and investors will become disappointed.
Disclosure: I am short SPLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.