MKM Sees A Beat For Splunk, Says Concern Over Cloud Transition Likely Limits Upside

Splunk Inc 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.

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.”