If Splunk's Revenue Accelerates, Shares Could Quickly Command A Higher Premium

Splunk Inc SPLK's revenue slowed from the “super-fast” growth seen a few years ago, and Argus’ Joseph Bonner noted that with the shares appearing fairly valued, it is better to stay on the sidelines for now.

Bonner initiated coverage of the company with a Hold rating.

Shares Could Rise

The analyst believes, however, that “the shares could quickly command a higher premium if revenue accelerates, or even slows more gradually than investors expect,” and stated that “Splunk could become an acquisition target for a larger enterprise software firm.”

Bonner sees Splunk as an early-stage data analytics firm that has a robust technology base, and given the company’s presence in a rapidly growing market, its success would largely depend on execution, especially management’s ability to ramp software sales and gain market share without compromising margins or running into losses.

In fact, management has guided to 34 percent revenue growth in 2017, up from the initial guidance of 27 percent growth. Splunk also expects full-year operating margins of 5–6 percent, up from its earlier guidance of 5 percent.

“Our non-GAAP EPS estimates of $0.34 for FY17 and $0.55 for FY18 imply growth of 76 percent over the next two years,” Bonner stated.