Splunk: Bet on Big Data

07/04/2014 8:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

This “big data” stock was absolutely demolished in the first half of the year, falling from a high near $95 to a low near $40. It was a classic case of a momentum stock story turned sour, explains Tyler Laundon, editor of 100% Letter.

But in reality, the only thing that changed at Splunk (SPLK) was the share price. Indeed, the business fundamentals are no worse for wear.

Splunk develops software that it sells to large organizations, typically in the financial services, manufacturing, retail, and technology industries. It has a large and diverse customer base of over 7,400 customers.
SPLK specializes in "machine-generated data" that is produced by all varieties of electronic devices including electrical meters, mobile devices, automobiles, medical devices, GPS devices, and radio-frequency ID tags, among others.
By reading activity logs generated from these devices, SPLK's software gives clients information on activities from financial transactions to user activities to security threats.
The trick for SPLK is to tap into the data and deliver it to clients in a way that they can use to save money or generate new sales to their own clients (or both). Thus far, it has been incredibly successful on the sales end of things. In Q1 2014, revenues grew by 50% over Q1 2013.
Splunk is a momentum stock that was going full-steam when the wind died. But the same rapid growth and strong business fundamentals—that made the stock so popular (and overpriced) at the beginning of 2014—still persist today. The stock is just a lot less expensive.
Investors have realized that the selling in growth stocks was overdone, and they're starting to buy up some of the hardest hit, like SPLK. I think we have an opportunity here to get into one of the most desirable stocks in a massive market (big data) at a time when investor uncertainty is still relatively high, but fading fast.
We can buy SPLK today for about the same price that the stock was trading at a year ago. It's a compelling entry point, and a year from now I won't be surprised if we see SPLK trading for over $100 a share.

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