Oracle And Splunk: 2 Cloud Opportunities Floating Under Most Investors' Radar

Credit Suisse initiated coverage of Oracle Corporation ORCL and Splunk Inc SPLK, assigning Outperform ratings to both companies. The firm characterized these two companies as cloud opportunities floating under the radar of most investors.

The price targets on Oracle and Splunk were set at $62 and $80, respectively.

Oracle's Unappreciated Staying Power And Upside Potential

Analysts Brad Zelnick, Jobin Matthew and Syed Talha Saleem believe the market underappreciates the staying power of Oracle's technology stock and upside opportunities in the cloud. The analysts noted that Oracle is in the pole position of the cloud ERP opportunity, which is now heating up.

In the database segment, which fetches roughly 40 percent of revenues and the bulk of profits, Credit Suisse said the company will lose lower value units but more than compensate with innovation, pricing and aggregation of adjacencies with DBaaS. The firm values DBaaS migration opportunity at $6.31 in recurring earnings per share.

"ORCL is our favorite aggregation play. We particularly like companies that can parlay dominant market positions into adjacencies to capture incremental wallet share," the firm said.

"This has been a consistent strategy for ORCL over the years (M&A, Exa-series), and Cloud is just the latest chapter."

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Unique Asset With Strategic Value

Credit Suisse views Splunk as a unique asset with significant strategic value despite the risks of a cloudy transition and recent execution follies. The firm sees Splunk as being on the right side of several industry megatrends such as cloud, big data, IoT and security.

The firm pointed to Splunk being the only security company of scale not exposed to secular disaggregation such as Palo Alto Networks Inc PANW, Check Point Software Technologies Ltd. CHKP and Fortinet Inc FTNT.

Additionally, the firm commented upon Splunk's $1 billion in revenue scale, compounding at 27 percent, and free cash flow at 38 percent over the next three years.

Credit Suisse termed Splunk as a distant leader in a $25 billon total addressable market with no competition in sight. The firm approved of the company's 2020 roadmap, which appears highly achievable.

"We see Splunk's transition to the Cloud as a compelling aggregation opportunity, driving CLTV and overall cash flow growth as Cloud bookings quadruple to $400m in F2020," the firm said.

On valuation, the firm noted that Splunk shares have been a frustrating investment over the last few year, as its multiple contracted by two-thirds, as free cash flow nearly tripled.

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