Splunk Analysts Bullish Despite Investor Pullback Following Q4 Print

Data analytics company Splunk Inc SPLK reported a disappointing fourth-quarter bottom-line result Wednesday and issued a weak revenue forecast for the first quarter and fiscal year 2021, sending shares lower.

The Splunk Analysts

Wells Fargo analyst Philip Winslow reiterated an Overweight rating on Splunk with a $200 price target. 

Credit Suisse analyst Brad Zelnick reiterated an Outperform rating and $170 price target.

Stifel analyst Brad Reback maintained a Buy rating and increased the price target from $150 to $160.

Wedbush analyst Steve Koenig reiterated an Outperform rating and hiked the price target from $195 to $200.

Baird analyst Rob Oliver maintained a Neutral rating and $150 price target.

Cowen analyst Derrick Wood maintained an Outperform rating and raised the price target from $160 to $165.

Splunk's Robust Revenue, Cash Flow Growth Can Be Sustained: Wells Fargo 

Splunk's annual recurring revenue grew at an accelerated pace of 54% year-over-year and demand for cloud solutions remained robust, Winslow said in a note.

Cloud now accounts for about 35% of software total contract value, exceeding the company's expectations, the analyst said. 

The revenue shortfall the company is predicting for 2021 is due purely to a higher mix of cloud bookings, he said. 

Cloud revenue is recognized ratably and therefore its immediate contribution to revenue is significantly less than that of a term license, Winslow said. 

Splunk guided ARR to grow at a 40% three-year CAGR to about $4.610 billion in fiscal year 2023, well above the consensus and Wells Fargo's previous estimate of $4.363 billion.

The fact the company reiterated its 2021 ARR and operating cash flow guidance signals that there is no meaningful change to true underlying business expectations, the analyst said. 

"We believe that Splunk's differentiated, disruptive technology positions the company to take advantage of the massive growth in unstructured and semi-structured data — enabling the company to sustain robust revenue and cash flow growth to meet management's long-term targets and consensus expectations." 

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Splunk's Initiatives Driving Future Growth: Credit Suisse 

A faster cloud transition will weigh on both revenue growth and profitability in fiscal year 2021, but longer-term guidance of 40% ARR growth through 2023; revenue acceleration to the high 20% range in fiscal years 2022 and 2023; and $1 billion in OCF by 2023 gives comfort, Zelnick said in a note. 

The analyst sees potential upside in ARR growth in the long term given the perpetual maintenance conversion to term or cloud is not baked into the guidance.

"Ultimately, we believe Splunk has removed barriers to adoption, expanded its use cases, and is making the investments to drive future growth and a more predictable business model." 

Cloud Transition The Right Long-Term Strategic Decision: Stifel 

The transition to cloud will weigh on Splunk's financial model in 2021, Reback said.

Yet the analyst expects revenue growth and profitability to snap back in the following year.

The cloud transition is the right long-term strategic decision, he said.

Stifel believes Splunk can now show sustainable 20% growth and an improving cash flow profile as the transition plays out in the coming years, Reback said. 

Splunk's Trading Multiple Looks Attractive: Wedbush 

Adoption of Splunk Cloud and the company's growing portfolio of offerings for upstream and downstream data flows should further augment its leadership in machine data, Koenig said in a note. 

The analyst said Splunk's March 24 investor day could shed incremental light on the model transition to recurring revenue and delve into an inflection in operating margin and cash flow that's expected early next year.

"As FCF normalizes in FY23/CY22 in the wake of SPLK's shift to annual billings and elimination of perpetual licenses, SPLK's EV/FCF trading multiple looks attractive (24x CY22E and 18x CY23E), given the company's impressive growth trajectory."

Cowen Continues To Find Splunk Attractively Valued

The increasing cloud mix is a big reason for the limited upside, even as Cowen was expecting greater upside in the quarter, Wood said in a note.

The analyst said overall bookings were stronger than they appeared. 

Splunk's explanation for the lower revenue guidance made sense, he said.

Wood views the guidance as providing attractive medium-term goal posts.

"We think the numerous moving parts in the model could weigh on the stock near-term, but with the guide of high 20% growth in out-years, there should be good valuation support," the analyst said.

Cowen continues to find the stock attractively valued.

SPLK Price Action

Splunk shares were slipping 5.89% to $146.24 at the time of publication Thursday.