'Compelling Asset': Splunk Analysts Bullish After Software Company's Q1, But Investors Pull Back

Data analytics company Splunk Inc SPLK reported a beat-and-raise first quarter Thursday.

Notwithstanding the solid results, the stock was sharply lower in Friday's session. BTIG analyst Edward Parker told Benzinga Friday that Spunk had a "great quarter," but billings and cash flow were lower than expected on a headline basis. 

The Analysts

Stifel analyst Brad Reback reiterated a Buy rating on Splunk with a $150 price target.

Raymond James analyst Michael Turits reiterated an Outperform rating and $157 price target.

Mizuho Securities analyst Gregg Moskowitz maintained a Buy rating and $155 price target.

Wedbush analyst Steve Koenig reiterated an Outperform rating and raised the price target from $159 to $163.

KeyBanc Capital Markets analyst Liz Verity reiterated an Outperform rating and $151 price target.

Stifel: We'd Buy On Weakness

Splunk reported another strong quarter, with outperformances across all metrics, Reback said in a Friday note.

The negative stock reaction was due to a reduction in the 2020 cash flow guidance that reflected headwinds associated with an accelerating mix shift toward more renewable revenues, the analyst said. 

The company's business is growing at a healthy clip, and cash flow yields are likely to normalize in the coming quarters as the subscription transition reaches a steady state of maturity, Reback said, citing the underlying financial metrics. 

"We believe the reaction to be overblown and would be buyers on weakness." 

Raymond James Sees Dominant Platform

The security analytics business contributed consistently despite a tough first quarter for security companies more broadly, Turits said in a Friday note. 

Based on the first-quarter top-line beat, the analyst hiked his 2020 and 2021 revenue guidance.

"We continue to view Splunk as the dominant platform for ingesting unstructured and 'machine' data for IT, security and over time for business analytic and IoT applications beyond IT, and remain encouraged by expansion into automation and machine learning."

See also: Sell-Side Likes Splunk's Q4 Earnings, Outlook 

Splunk One of Mizuho's Top Picks

Splunk's good first quarter was characterized by significant revenue upside, with acceleration in software revenue growth to 54 percent year-over-year and better-than-expected short-term billings growth, Moskowitz said in a Friday note. 

Yet billings were subpar, reflecting higher-than-expected uninvoiced contract value, the analyst said. 

Mizuho is not concerned about the lower 2020 cash flow from operations guidance, as cash flow inflection could come on the back end due to an accelerated shift to renewables, he said. 

Designating Splunk as one of its top picks, Mizuho said the company is well-positioned to continue to grow at a high rate.

Citi: Metrics Paint Divergent Stories

Splunk's headline revenue remained strong on strong software revenue that was driven by license and cloud growth reacceleration, said analyst Walter Pritchard. But bookings growth decelerated, billings missed estimates, maintenance revenues declined sequentially, new customer additions fell year-over-year and large deals were up a mere 6 percent, he said. 

The analyst said he sees growth slowing into the second half of 2020, especially on tougher comps.

Wedbush Would Buy Stock Now 

The $100-million reduction in Splunk's operating cash flow guidance represents less than 5 percent of Splunk's likely fiscal 2020 billings, Koenig said in a Friday note

"Moreover, the shift to recurring contracts should drive cash flow acceleration by FY21 and lift SPLK's economics in subsequent years," the analyst said. 

With new business likely growing at 40-percent-plus, cash flow acceleration on the horizon and the valuation being relatively inexpensive, Koenig said he expects Splunk investors to be amply rewarded over the next 12 months.

"We would be buyers at the current time and price." 

KeyBanc: Splunk Remains Compelling Asset

Notwithstanding the slowdown in customer additions, large deal metrics were strong, with 46 customers spending over $1 million during the quarter compared to 43 in the previous quarter, suggesting broader platform adoption, Verity said in a Thursday note. 

The traction in large-platform deals is evidence of the company's broader value proposition and ability to continue to take wallet share within its installed base, the analyst said. 

"We believe SPLK remains a compelling asset, with significant opportunity to expand wallet share in its enterprise customer base, based on both broader deployments and an increasing number of use cases, while continuing to attract new customers." 

The Price Action

Splunk shares were down 7.33 percent at $119.30 at the close Friday. 

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