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Splunk: Too Little Upside Potential

May 05, 2020 2:27 PM ETSplunk Inc. (SPLK) Stock13 Comments


  • Splunk's revenue growth rate of 10% for fiscal 2021 is not likely to be met. Indeed, Splunk is likely to pull its fiscal 2021 guidance.
  • Splunk's ARR is not the same as total revenues.
  • This investment remains overvalued at more than 8 times forward revenues.
  • 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) is a cloud platform that allows customers to harness the value of their data. And no matter how attractive and promising this may sound, this rhetoric is not being translated into its financials.

Before COVID-19, Splunk's revenue growth rates were already pointing towards deceleration. The bullish argument has been that as Splunk migrates its customers towards a subscription-based business model, there is expected to be a period of deceleration and that Splunk should bounce back next year.

But I fail to buy this argument. Here's why:

Splunk Logos

To avoid confusion please note: Splunk's fiscal 2021 ends in January 2021.

Upcoming Earnings Report Will Be Key

We are approximately 2 weeks away from Splunk's Q1 2021 earnings report. This report will show just how realistic its full year 2021 guidance has been. In the past, many investors positively charged that Splunk was low-balling its 2021 revenues to allow for plenty of room for beating estimates; but I do not believe that to be the case. In fact, I suspect that Splunk will pull its 2021 guidance.

However, regardless of whether or not its guidance ultimately gets pulled, it shows that Splunk was on target to post just 10% of revenue growth in fiscal 2021.

Again, the thesis is that Splunk is taking its customers away from one-off licenses, towards a subscription-based business model. This means less revenue upfront but more stability and predictability for Splunk as it books that revenue pro-rata.

Indeed, herein lies the whole bullish thesis: If Splunk is able to successfully migrate its customers away from one-off purchases, towards being locked in over a period of years, then this investment could be rewarding at a certain valuation (more below).

What Is Defined As High Growth?

When Splunk had its earnings call at the start of

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Michael Wiggins De Oliveira is an energy specialist whose primary focus is capitalizing on “the Great Energy Transition” - the confluence of decarbonization, digitalization with AI, and deglobalization - to achieve greater investment returns. Through his 9+ years analyzing countless companies, Michael has accumulated outstanding professional experience in the energy sector and a following of over 40K on Seeking Alpha.

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Comments (13)

Alexander Bogdashin profile picture
That aged well
Bill in Shanghai profile picture
Wow, did you ever get this wrong
Great stock, one of my biggest holdings. Fantastic new partnership with GOOG. Up big time after earnings, yeah!!!!
I am selling this stock, it does not make any money. It is headed lower. Dump it.
Yes, because GAAP profitability is the only measurement for deciding to own or not own. #SMH
Multiple will expand as underlying demand remains robust and business model shifts to recurring from transactional. MSFT and AAPL provides the template. The transition may hurt short-term, but will create signifiant value long-term.
Markets seem to like the GOOG/SPLK cooperation news, SPLK up >6% @ today's close.. With a 23B market cap, SPLK might even be an (all stock?) acquisition target for GOOG, who like to test the waters before they make an offer. SPLK's bus model of providing real-time operational intelligence to corps worldwide is certainly extremely attractive to a company that lives/dies by crunching numbers and targeting ads.
EriCoin profile picture
What do you think of the latest Google cloud partnership with Splunk? I think it cements how far Splunk came to be important player in the cybersecurity sector. I'm thinking of adding in to my position. I'm long Splunk.
Young&Wealthy94 profile picture
Hahaha Mike, I’m laughing to the bank with this one
Michael Wiggins De Oliveira profile picture
Yes, that's good. It's important to enjoy life. ;) @Young&Wealthy94
Eddie Gray profile picture
No worries. Even though Splunk stock has gone up since the article and the announcement of the Google partnership is a potentially big thing.....these counterpoint articles are good for all of us. It allows me/us to never go "all in" on the market or a stock. Two examples for me are ATT given all of the pro T articles on SA and my $$ languished for years on that one and most recently I bet on Oil to go up before the contagion thing set it. The good news on both of those examples for me is they were smaller positions that did not impact me long term at all (in other words it was a small amount of money that I could easily afford to not have).
meanwhile, just announced today "Splunk forges integration pact with Google Cloud". Which is very big news IMO:

I think google could seriously consider Splunk an acquisition target in the not too distant future.
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