SPLK

I noticed that SPLK is relatively cheap for its growth rate. i think its trading something like 8x this year sales on 30% growth. thats pretty low for a company that has delivered pretty consistent growth for a while. i don’t own it, but just as an exercise, i was trying to figure out why its trading so cheaply. is it simply a matter of the log analytics area being so competitive, with ESTC coming up as a major rival?

Or is there limited future use cases for its technology? Morningstar said “While we do not argue that machine data volume is expected to grow exponentially over the next decade, we are not as confident that companies will be able to generate meaningful and actionable insights from all of the data. We believe there is a possibility that some of the data falls into the “garbage in, garbage out” category, which could lead companies to be more selective about which workloads they choose to send to Splunk.”

i just found it odd that a company in such a “hot” area like big data is trading so cheaply and wonder if it indicates anything about the future valuations of other data related companies like ESTC or AYX, which i do own. i noticed SPLK used to trade at a 15-30x multiple in 2013-2015 but the valuation fell off a cliff after that

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Stockfan,

Splunk has a conundrum in its business model that ESTC and AYX do not. That is Splunk charges by the gigabyte (or whatever metric they use by data volume) meaning the more data you analyze the more you pay Splunk. This causes businesses to only analyze as minimal data as they can get away with.

ESTC bills by the node. AYX bills by each user seat no matter how much data they clean and analyze. Note that AYX is not in the same business as Splunk or ESTC.

Thus, with ESTC you have less disincentive to analyze more data. With AYX no disincentive at all. That is one of Splunk ‘s issues they need to overcome. There are others, but that is the most relevant to that article.

Even with this Splunk has done incredibly well as a business. Largely because I think they had no real competition. They now have real competition. This may not tame down on Splunk’s growth rate, which is still very nice for a company its size. But it may limit Splunk’s pricing power. Many anecdotal tales of Splunk customers switched no to ESTC. This said, those anecdotal stories are true, but it has not been something that has slowed Splunk’s growth down.

Tinker

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Thanks Tinker, that helps me understand what is going on. i skimmed a few of the last earnings call transcripts and a bunch of analysts brought up the issue with pricing and how customers don’t like it.

also saw this from a Bloomberg analyst which may explain why people are more cautious on Splunk right now: “Splunk’s lack of clarity on revenue-growth drivers beyond its $2 billion target for fiscal 2020 still weighs on its long-term outlook. It remains reliant primarily on its on-premise product sales tied to security and IT operations. We believe Splunk’s large on-premise exposure, and the stiffer competition in security from large firewall providers, are risks to sales-growth momentum”

in a nut shell, growing competition and a lack of a second/third act beyond security/IT operations seem to be keeping Splunk down right now. expanded use cases seem to be limited by the way Splunk prices its software

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Splunk does have unlimited data plans but I don’t know the price or what portion of their customers it becomes rational to switch to that plan.

I am negative on Elastic because of Splunk. Splunk has to be doing something seriously wrong for Elastic to flourish. Splunk has fended off multiple open source alternatives in the past yet they remain the undisputed king of their domain. But look at their S&M expense. It has been growing significantly. Suggesting they are having difficulty sustaining 35%+ growth at their size. Which may explain the cheapness in the shares.

But with all the competitors in this industry and what’s going on I think maybe some of us have overhyped the market for big data. I seem to have.

If Elastic is the Splunk killer why is their revenue growth rate falling so fast? And why are they getting involved with endpoint security with a bit player? That’s where they are funding traction? In security? Not big data? This is the reason I do not own estc. Or Splunk.

A bet on estc is a bet that SPLK is getting it terribly wrong. The fact that estc’s growth rate is falling suggests that may not be the case.

I’m interested in estc for their continued development of their search functionality. But would like them to see their growth go back up before calling them a Splunk killer.

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I am negative on Elastic because of Splunk. Splunk has to be doing something seriously wrong for Elastic to flourish. Splunk has fended off multiple open source alternatives in the past yet they remain the undisputed king of their domain. But look at their S&M expense. It has been growing significantly. Suggesting they are having difficulty sustaining 35%+ growth at their size. Which may explain the cheapness in the shares.

But with all the competitors in this industry and what’s going on I think maybe some of us have overhyped the market for big data. I seem to have.

If Elastic is the Splunk killer why is their revenue growth rate falling so fast? And why are they getting involved with endpoint security with a bit player? That’s where they are funding traction? In security? Not big data? This is the reason I do not own estc. Or Splunk.

A bet on estc is a bet that SPLK is getting it terribly wrong. The fact that estc’s growth rate is falling suggests that may not be the case.

I’m interested in estc for their continued development of their search functionality. But would like them to see their growth go back up before calling them a Splunk killer.

I own both SPLK and ESTC with comparable positions in both. I have owned SPLK longer and then added ESTC after its IPO.

I am not a techie but rely on the expertise of others in this area. From my reading, it appears that there is currently only minimal overlap between the two companies’ offerings. It’s unclear whether this will meaningfully change. I see very mixed analyst opinions on SPLK with some very bullish and others bearish (Citi for one). In the meantime, SPLK continues to have solid growth.

Is there room for both? I’ve seen $45 billion as the TAM for ESTC and greater than $70 billion for SPLK. I’ve also seen commentary indicating that the TAM has continued to grow without apparent limitations for now.

I’m constantly reassessing both names. SPLK has not advanced considerably over the past year but seems to still be in an upward trend. At 8 times forward revenue, it’s relatively cheap. It’s also profitable with rapidly increasing earnings. ESTC is much more expensive at 16 times forward revenues but its growing faster. Neither seems expensive in the current market though.

SPLK’s offerings are more expensive and that worries me. Unless they continue to maintain differentiation in offerings, competition will be a significant issue regardless of TAM.

I’m probably a little more bullish on ESTC at this point. It seems to make sense to pay up for growth. But I will reassess after SPLK’s earnings call in 8 days and then ESTC’s earnings 2 weeks later.

dave

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I agree that Splunk’s charging by data volume has indeed been the main obstacle to its growth. Thought this 5 years ago when the company I was at first started using it.

However, Splunk really is best of breed. One of the teams I manage has decided to go with Splunk rather than Tableau, and thinks they can get away without Alteryx for a while. Products like Alteryx and Tableau are easier for end users to use, but Splunk’s data language is incredibly powerful if you have a techie writing the scripts.

Right now, however, this does seem like a Betamax vs VHS problem. Splunk is the Betamax, but its own business model limits its adoption. Someone needs to give their Marketing/Sales department a slap upside the head.

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