This data mining company was recently upgraded to “overweight” from “equal weight” by Morgan Stanley, and is growing at a double-digit pace.
Splunk, Inc. (SPLK)
from Top Stock Insights
“Machine-generated data” is produced by all varieties of electronic devices, including home appliances, electrical meters, mobile devices, automobiles, medical devices, GPS devices and radio-frequency ID tags.
It is the fastest growing category of data in the world. Today, around 11% of data is generated by machines. Industry analysts expect that to rise to 40% within the next 6 years.
A select few companies are working to build search engines for machine-generated data; in a sense to do what Google did for web content. One of the emerging leaders in the space is Splunk (SPLK). The company 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 clients.
Since any electronic device with an imbedded processor generates machine data, SPLK has a large and growing ecosystem of devices from which it can pull data to sell to its clients.
Over each of the last 5 years annual revenues have grown by 93% (2010), 89% (2011), 83% (2012), 65% (2013) and 52% (2014). The pace of growth is slowing since it’s harder and harder to grow by more than 50% on a larger and larger revenue base.
But Splunk’s billings and deferred revenue—two measures that help us forecast future revenues—remain strong. The company is closing more large deals than ever and selling more into its existing user base, two factors that suggest clients are becoming more dependent on the product.
I’m modeling in 30% to 40% annual revenue growth over each of the next three years, which I believe is entirely reasonable, if not conservative. That will mean revenues rise by over 150% by the end of fiscal year 2017 (calendar year 2016).
This year I expect SPLK to deliver adjusted EPS of $0.05. Then things should take off, with the next two years delivering $0.20 and $0.50 in adjusted EPS. These results will open up the stock to greater institutional ownership and suggest a lower risk investment. But by the time the results are in, I expect the stock price will have already doubled. So it’s better to buy into this $6.6 billion company now.
Splunk’s shares were hammered earlier in the year. But investors have realized that the selling was overdone, and they’re starting to buy it again. In the most recent quarter Splunk handily beat both revenue and earnings estimates by delivering revenue of $101.5 million (vs. consensus of $93.9 million) and EPS of $0.01 (vs. consensus of -$0.2). Management also raised full year guidance by 5% to revenue of $423-$428 million.
We can buy shares 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.
Tyler Laundon and Ian Wyatt, Top Stock Insights, www.topstockinsights.com, 866-447-8625, September 23, 2014