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Splunk: Investors Avoid This High-Flying PaaS Company

Mar. 10, 2020 11:21 AM ETSplunk Inc. (SPLK)14 Comments


  • Investors underreact to Splunk's Q4 2020 results and guidance.
  • Splunk's 3-year 40% ARR CAGR may not be enough for shareholders to hang onto.
  • Investors should avoid this overvalued stock.
  • Looking for a helping hand in the market? Members of Deep Value Returns get exclusive ideas and guidance to navigate any climate. Get started today »

Investment Thesis

Splunk (NASDAQ:SPLK) delivered Q4 2020 results which surprised the market and led to an abrupt sell-off, -14%. The sell-off then worsened as it combined with pervasive coronavirus fears.

However, I contend underlying this volatility, Splunk delivered a thesis-breaking report.

I contend that shareholders are overpaying for a company that is overvalued in the face of decelerating revenue growth rates. Here's why:

High Growth Company Without High Growth Rates

The whole point of investing in a high growth, recurring revenue business model company is that it should have two noteworthy aspects:

  • High growth revenue rates (at least 20%); and
  • Recurring, stable and predictable revenue growth rates.

With that in mind, please note the graph below:

Source: author's calculations; *** company guidance for 2021 (calendar 2020)

How is this growth rate in any way stable or predictable? We can see that just two years back Splunk was growing its total revenues at close to 40%, and now looking forward to fiscal 2021, it's guiding for just $2.6 billion of total revenue.

Bullish shareholders would retort that Splunk is guiding low to allow for sandbagging. Possibly. Nonetheless, the drop from growing at 40s% two years ago to just 10% is odd.

Management declares that it's nothing to worry about, that this decline in revenue growth rate has more to do with the mix of contracts and its booking of ratable revenue.

In fact, management asserts that once Splunk gets into fiscal 2022 and fiscal 2023, its growth rate should rapidly 'bounce back' into the high 20s% growth rates.

Carrots to Hang Onto?

To give shareholders something to look forward to, management notes that over the next three fiscal years, it is targeting 40% ARR CAGR.

Now, let's break this target down:

Source: Slide 15

The first aspect that is important

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Comments (14)

Come on, is this really your analysis? You should do your job right and inform yourself about the companies you write about.

Splunk is doing a transition from upfront Software sales to a subscription model and its doing that really quickly. Do you think it has an effect if you charge just a monthly fee instead of a big check you get just once? If yes, you should mention that in your article instead of making prediction about stocks without having any clue why the revenue grows as it does.
I am a potential Splunk Investor & the reason I am interested is the change to the subscription based model
Young&Wealthy94 profile picture
Wrong about JD and will be wrong here, sorry
Michael Wiggins De Oliveira profile picture
Maybe I'll be wrong. I'm often wrong.

... but I've actually changed my mind about JD and I'm a shareholder now (don't tell anyone else). There again, I'm often wrong. hehehe
A big theme in software is that companies are re-platforming off prem (off their own network) and onto the cloud (hosted by AWS). Cloud has a different financial model, you pay in installments. Its like paying for a gym membership for 3 years all at once or paying 1/3 a year for 3 years. So SPLK is in this transition. SPLK market cap is $20 billion. The revenue multiple is the question. Smaller companies are trading for double-digit multiples. Larger companies more profitable but growing slower than SPLK are also trading for higher revenue multiples.

SPLK is very well positioned as one of Amazon Web Services main software partners so I think the growth should be strong as AWS is well positioned for growth.
Michael Wiggins De Oliveira profile picture
@Crazy Eddy
Happy first comment.

'The revenue multiple is the question. '

I agree.
you seemed to be implying there was a problem with the company and/or the growth rate. Do you know of any software companies with accelerating revenue growth off a $3 billion base?

ADSK 4B ARR, $36B mkt cap $164 stock
ADBE 9.9B ARR, $160B mkt cap $332 stock
SPLK 2.4B ARR, $20.6B mkt cap $132 stock
Michael Wiggins De Oliveira profile picture
Accelerating or stable?

There is a huge difference.
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