Splunk: Better Deal

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About: Splunk Inc. (SPLK), Includes: CRM, DATA
by: Stone Fox Capital
Summary

Splunk remains a bargain in comparison to the price paid to buyout Tableau Software.

The company continues to grow revenues at a 30% rate despite a move to renewable contracts.

The stock is still down $25+ from the highs and trades at the lower end of the historical range at ~6.4x forward sales estimates.

The Salesforce (CRM) acquisition of Tableau Software (DATA) brought our focus to one stock: Splunk (SPLK). Both Tableau Software and Splunk have generally been linked together having gone public in the same time frame of 2012/2013 and focusing on the big data concept. The deal reinforces the business intelligence category and reinforces my bullish investment thesis on Splunk when the stock dips.

Image Source: Splunk website

Better Growth

Over the years, Splunk has had the better operations by constantly generating faster growth. The Alphabet (NASDAQ:GOOG) (GOOGL) acquisition of Looker made analysts like KeyBank seem smart by previously finding extreme value in Tableau Software.

The firm slapped a $165 target on the stock and, apparently, Salesforce agreed. The company agreed to pay 1.103 shares of Salesforce valuing Tableau Software at a market valuation of $15.7 billion or the equivalent of $178 per share. The stock is now worth $166.50 after Salesforce has slipped to about $151 on the merger news. Tableau Software is down to where KeyBank pegged the stock value.

The interesting part is that Splunk has a market value of about $17.5 billion now. The company has distanced itself from Tableau Software over the years, and Splunk is now approaching revenue targets heading towards double the goals of Tableau Software.

Salesforce was even willing to pay a large premium for a deal that will cost a 75 bps hit to non-GAAP operating margins and cause an adjusted EPS impact of $0.38. The stock is trading weak for this reason, but Tableau Software executives did decide to take stock of Salesforce to continue playing the bullish long-term trends in data. Splunk places the 2020 total addressable market at $62 billion.

Source: Splunk 2018 Analyst Meeting

Over the years, Splunk has grown much faster than Tableau Software. Splunk has consistently maintained growth rates in the 30%+ range while Tableau has constantly faltered. The companies were similar in sizes in 2016, but Splunk has a vastly larger revenue base now and the gap is only growing.

Chart Data by YCharts

Splunk recently raised FY20 revenues to $2.25 billion, up from $2.20 billion, but the forecasted growth rate is down to 31%. Analysts are at only 21% growth in FY21 with revenue pegged at $2.7 billion. At the rate that Splunk typically beats estimates, the analyst community is likely to slowly raise these numbers over the next year.

Regardless, the current fear is that growth has slowed and the shift from perpetual licenses isn't helping in the short term. Splunk saw the renewable business mix shift to 77% last year and forecasts a growth rate to 85% this year. This shift lowers initial revenues and cash flows in favor of more consistent and strong long-term metrics.

Better Value

The question here is why isn't Splunk an even better deal for an acquisition. Prior to the deal announcement with Salesforce, both stocks traded at a forward P/S multiple of ~6.4x. The ironic part is that the stocks traditionally bounce back and forth within a similar range despite Splunk traditionally offering the better results and growth rates.

Chart Data by YCharts

The company that uses machine learning for data monitoring and analysis for predictive monitoring of corporate data has the better growth. Tableau Software was valued at nearly 9x FY21 revenues of $1.65 billion by Salesforce.

Splunk is quickly moving into the cloud and software revenues where FQ1 growth rates were 85% and 54%, respectively. Any slowdown in revenue growth rates could quickly reverse as Splunk Cloud expands. The company is set up for a better future as more customers move away from contracts that require maintenance in order to set the customer up on the Splunk platform.

Takeaway

The key investor takeaway is that Splunk is an appealing stock considering Salesforce was willing to pay such a premium price for Tableau Software. Investors shouldn't buy Splunk for a trade expecting a buyout, but the stock makes a good long-term investment on the increasing importance of customers like Slack (WORK) using Splunk software to analyze the big amounts of data on their platform to monitor messaging platform.

At a similar multiple as the Tableau Software buyout, Splunk would trade up about 37% to $160. The risk in the business intelligence sector and general software market is that some of the revenue slowdown is more related to competition and not the shift to renewable contracts. The risk appears low, but Splunk did trade below $100 on multiple occasions towards the end of 2018.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.