Splunk (SPLK) is a provider of machine data analytics software that enables clients to make more informed business decisions, notes Joseph Bonner, an analyst at the leading independent research firm, Argus Research.
Splunk’s software gives clients real-time operational visibility into IT infrastructure, operations management, security and compliance, software development applications management, and business and web analytics.
Its products also enable enterprises to search, monitor, and analyze big data sets, including those from emerging technology applications like IoT and industrial data, and use these insights to remediate any issues.
Although its original focus was IT operations management, CEO Doug Merritt has made expansion into cloud software computing the company’s top growth priority.
Splunk also continues to invest across its product line to expand into relevant product adjacencies such as IT network security, often driven by customer requests.
We think that Splunk’s rapid technology innovation in the enterprise IT operations management (ITOM) and security information and event management (SIEM) markets is key to continuing the company’s rapid revenue growth.
The biggest current investor debate about Splunk is the company’s shift from a perpetual model to a ratable model over a three-year contract term. We note that as the company moves through its business model transition, traditional valuation metrics may be skewed.
As we have seen on many occasions, when tech companies make this change, their current financials tend to deteriorate as smaller increments of ratable revenue are compared with previous perpetual license contracts that included large upfront payments.
Essentially, a timing difference makes current financials look worse. Add to this the transition to newer lower-margin cloud services as the company builds scale in the cloud, and the company’s financials look lousy for the time being.
We expect these issues to work themselves out over time. Management has noted that the transition to ratable cloud business has been faster than expected.
ough we are loath to play M&A roulette, we believe that Splunk is exactly the kind of company that could become an acquisition target for a larger enterprise software firm . We are maintaining our "buy" rating and raising our target price from $215 to $260 per share.
