We took Splunk public in 2012 and have always believed in its unstructured data leadership. SPLK has had to reinvent itself after the departure of luminary former CEO Godfred Sullivan. Doug Merritt was handpicked to run the company, and after two years we believe he is hitting his stride and has built the right team around him. We believe the company has largely worked through its transition issues and should be able to sustain some of the best billings and cash flow growth in our coverage, which is not reflected in the current stock price.
Despite a big move after Q3, the stock still trades at a 40-50% discount to peers on an EV/FCF/G basis, and has underperformed high growth peers by more than 50% since 2H-2013, while seeing the NTM revenue multiple contract by nearly 6 turns from 12 to 6.5x, even as high growth names have seen rev multiple expansion from 6.5 to 7.7x. The stock is still fairly controversial as evidenced by the magnitude of price movements during earnings. We initiate with Buy rating and a $105 price target based on 0.9x EV/FCF/Growth, a 30% discount to peers.
We'd like to invite you to a conference call Thursday January 4th at 11am Eastern to discuss:
1) Are recent execution issues behind the company?
2) Can Splunk reach its 2020 guidance targets of $2bn or revenue (75% ratable), and what is it worth?
3) Can Splunk succeed in the cloud while sustaining growth?
4) Will Splunk’s stock compensation levels continue to be higher than normal?
We hope you can join us.