SPLK concerns

Investment Analysis Clubs Saul’s Investing Discussions
1

I just read this brief article on Yahoo Finance. It is causing me some concern:

"Splunk Inc (NASDAQ: SPLK) is scheduled to report its results for FQ3 of 2017 on November 29. Although the company is likely to deliver a beat, Splunk Cloud uptake could limit upside and result in “another deceleration relative to historical growth rates,” MKM Partners’ Kevin Buttigieg said. He maintains a Neutral rating on the company, with a fair value estimate of $55.

Splunk had reported a slowdown in license and billings growth rates in FQ2, although both metrics were ahead of consensus expectations. Since then, shares have lost 5 percent, and Splunk has been “a controversial stock,” analyst Buttigieg mentioned.

View more earnings on SPLK

The company cited a faster Splunk Cloud uptake as the reason for the slowdown, saying that this likely “took away some demand that otherwise would have gone to license and as annualized cloud billings are less than for a comparable license,” Buttigieg wrote.

Similar Headwinds In FQ3

The company may report another deceleration in license growth, similar in magnitude to the prior quarter. Similarly, consensus billings growth of 35 percent also represents a slowdown from the 40 percent recorded in FQ2.

“We expect both will beat, but think Splunk Cloud uptake will limit upside and expect another deceleration relative to historical growth rate,” the analyst commented. He added, “While investors had understood that the transition to cloud could have a negative effect on margins, they are now grappling with its negative effect on top-line growth as well.”

At last check, Splunk shares were down 0.73 percent at $59.44."

Is anyone else who owns shares of Splunk concerned by this?

2

Speedy,

While I have no idea what growth or guidance will come in at next week, I sold SPLK earlier this month purely because of valuation.

  1. Even if SPLK hits their target of 230M this quarter, PS will be over 9, which is higher than SQ, PAYC, and HUBS, all of which are growing as fast or faster. They’re not hugely cheaper than SPLK, but a little cheaper.

  2. Also, I just understand these other companies a little better, I think. Never got too comfortable with SPLK. Maybe you are – that would make a difference.

  3. I also like the fact that these other companies (SHOP too) have smoother revenue sequentially. Maybe SPLK has more seasonal factors – I have no idea – but again, that gets back to me simply not being super comfortable with them.

Bear

3

Thanks Bear. I appreciate the response.

4

Hi Speedy,
I think a lot of people don’t understand Splunk, and what it does. Splunk has a somewhat unique pricing model in that users buy a license for a fixed amount of data to go through software indexers, and then must pay overage charges when additional data goes through. Every year, the volume of data rises at most enterprises by as much as 50%. The bet that Splunk is making is that the huge costs associated with customer acquisition are going to be amortized over the years, over a substantially higher amount of revenue than that which is being currently reported (and with no further costs of acquisition).

I personally figure that they know what they are doing very well and I have no concerns about my position. But take into account that I’m not a techie.

I’d strongly recommend reading Bert’s deep dive: http://seekingalpha.com/article/4002652-splunk-really-need-s…

Best,

Saul

6 Likes
5

Thanks Saul…I will read the article.