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Splunk: Cloud Shift Can Accelerate Growth Even More

Jun. 06, 2020 2:58 PM ETSplunk Inc. (SPLK)8 Comments
Tech and Growth profile picture
Tech and Growth
2.74K Followers

Summary

  • Without the cloud shift, Splunk is already a deep-moat software company with an impressive ~$2 billion ARR that grows +40%.
  • The cloud shift, which enables a higher-velocity sales process, can accelerate growth even more.
  • The cloud free-trial model also enables more effective user journey tracking and analysis, which allows for better pipeline visibility and a more contextual lead qualification process.

Overview

The leader in the enterprise log management, Splunk (NASDAQ:SPLK) is one of the few companies in the software space we have liked for some time due to its resilient and fast-growing business. Having landed over 90 of the Fortune 100 companies as its clients so far and reaching over $2 billion of annual revenue last year, the company will turn to the SaaS model to accelerate growth further. Upon the complete transition into SaaS, Splunk will benefit from a higher-velocity customer acquisition process and better pipeline visibility as opposed to its historical contract-based model. We will maintain our overweight rating on the stock.

Catalyst

(source: company’s Q1 earnings call)

Splunk is a deep-moat enterprise software company with ARR accelerating at +40%. Even without the transition to the cloud, Splunk is already one of the most well-performing and most innovative software companies with its ARR accelerating at +40%. Splunk’s core offering is equipped with a patented dynamic log search technology, which can query, ingest, and process heterogeneous data. This proves to be the company’s competitive advantage in the business, given the offering’s capacity to process massive amounts of real-time security, DevOps, and even business-related data. Given the big-data capability and variety of use cases, the company has established a niche in the high-valued enterprise segment. As enterprise customers like Intel, Shopify, Blackstone, Hyatt, Nasdaq, and more have come on board, the total number of orders > $1 million has increased by over 68% to 494 over the last two years.

(source: company’s Q1 earnings call slide)

However, with the company growing at a staggering 40% CAGR to potentially reach ~$5 billion of ARR and ~$1 billion of OCF (operating cash flow) in 2023, it will be harder and harder for the company to move the needle on growth.

Consequently, the shift

This article was written by

Tech and Growth profile picture
2.74K Followers
Former tech operator, entrepreneur, and venture capitalist with over a decade of experience starting, investing, and building companies in Asia and US. Long-only manager seeking multi-asset technology / growth opportunities driving disruptive innovation globally.

Analyst’s Disclosure: I am/we are long 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (8)

D
I'm sorry, but your conflict of interest in "pushing" the names of what you already have long owned (as a fund manager and probably as an individual) is too much on display here. The fact you wrote this sentence: "...There are no major risk factors we see in Splunk at present..." means, above all else, you are neglecting any decent in-depth analysis of what can come at SPLK over the next 4-6 quarters (and, no, I'm not short). Wish you wouldn't be so blatant and construct better analysis showing downside along with upside. If a prolong recession hits, and middle market cap companies slow down on their uptake of SPLK's offerings, this stock can easily be in the $50-60 range in 12-16 months. Tjhe "higher velocity" you discuss can easily become "slower molasses". I encourage all SA readers to go to SPLK's own recent filings, and get a much more complete analysis (upside and downside) than what is presented here.
Tech and Growth profile picture
Thank you for your comment. We are staying as objective as we can, either as an individual, or a fund manager.

- Considering SPLK's strong outperformance and resilience YTD (even despite impact from coronavirus), we don't foresee splunk's fundamentals getting significantly weakened in the next 12-16 months, due to a major risk factor (or must i say, speculation) in the form of "recession".
- As such. we write about risk and upside that are quantifiable today. We do not speculate. Let alone suggesting a $50-$60 target price on a stock trading at $138 with strong fundamentals to-date.
- SPLK is a mission critical enterprise tool with strong expansion base, that's why this company has a visibility for 40% ARR guidance, even during coronavirus.
- With that in mind, mid-size slowdown will hardly be moving the needle, considering the smaller deal size. Higher velocity sales will drive growth, but not through increasing the uptake from mid-size and SMEs, but through acceleration of enterprise sales cycle (which has been more and more bottom-up, developer-driven in the last decade).

I encourage you to go to go to SPLK's own recent filings, and get a much more complete analysis (upside and downside) yourself, rather than making a recession speculation.
Booban profile picture
@D. Rider : "If a prolong recession hits, and middle market cap companies slow down on their uptake of SPLK's offerings, this stock can easily be in the $50-60 range in 12-16 months."

How do you motivate this prediction? As @Tech and Growth pointed out, Splunk fulfils a mission critical IT service. If you think companies who use Splunk will stop using Splunk when times are bad (They usually have a long term contract past any crisis), well they might as well throw out their PCs as well.
D
Booban,

There is no better way to describe what I am trying to say than to understand the difference between "Splunk Cloud, Splunk Connected Experiences, and Splunk Data Stream Processor" versus what is Splunk's bread and butter right now. I am NOT negative on Splunk, but I do believe I will be buying Splunk in the double digits over the next 12 months. Splunk management is good, I believe that, but they are not battle-tested in transitions (in fact, the team is full of neophytes in this regard, though they'll argue otherwise). Splunk should have been transitioning to the cloud 18-24 months ago. I've talked to companies who use Splunk's offerings right now. "Mission-critical"? Also, do you think Splunk is the only company in the data-visualization field? I sure hope not. Anyhow, I do hope I am wrong for all you who have bought in at these levels, or who jumped on the train from $100+. If you can hold long enough, and the transition goes smoothly the next 12 months, and the data-visualization field competitors just sit on their hands over these next 12 months, then things will be ok. But that is a lot of "ands" for someone like me, who's been going over 5+ decades in the markets. But, hey, quite honestly, that means nothing, and I am the first to tell anyone that. . It's only I believe that, from actually talking to Splunk users, that over the next 12-14 months, I will be buying Splunk at levels more than half lower than what we are seeing now. Either way, good luck to us all.
buddyrow4 profile picture
i agree . ūüĎć
b
They could be a great acquisition for ORACLE
C
They would be a great acquisition for several large companies I can think of: Microsoft, Amazon, Google, Sales Force
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