New Competition Challenges This Software Company
Abir is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Monday, at the 8th annual Value Investing Congress in New York, Zack Buckley, who runs Buckley Capital, declared that he believes Splunk (NASDAQ: SPLK) is in a “very tough competition,” having to battle with the likes of established powers HP, Intel, Oracle, and others. He also added that Splunk is a one-product company, and only worth $6-$12 per share based on its free cash flow valuation. The harsh review had an immediate negative effect on Splunk’s stock price, and, according to Buckley, these drops are only the beginning. While the stock currently trades at around $35, and the company is still growing, I believe Buckley's valuation is especially pessimistic, but possible.
About the Company
Splunk provides the engine for machine data. According to its website, Splunk software collects, indexes and harnesses the machine-generated big data coming from the websites, applications, servers, networks and mobile devices that power business. Splunk software enables organizations to monitor, search, analyze, visualize, and act on massive streams of real-time and historical machine data. More than 4,400 enterprises, universities, government agencies and service providers in over 80 countries use Splunk to gain operational intelligence that deepens understanding of a business and its customers, improves service and uptime, reduces cost, and mitigates cyber-security risk.
(Source: Yahoo Finance)
Basically, what Splunk's sole product does is accumulate a company's data on the cloud and analyze it for customers. Unfortunately for Splunk, there are other, bigger companies that are moving into the space. Oracle (NASDAQ: ORCL) is one of those companies that will heavily challenge Splunk. Oracle, which was a little slow to enter the cloud competition, is trying to leapfrog the market with its Exadata X3 database machine, which will be equipped with 26 terabytes of processor memory. A hybrid approach to the cloud could bring Oracle to the top of the market. Its Enterprise Resource Planning (ERP) software and data mining application directly challenges Splunk's service. Just the other day, Lending Club hired Oracle for its ERP software when it could've hired Splunk.
Evidence suggests growth of the data analytics industry is slowing down. One of Splunk's biggest competitors, Tibco Software (NASDAQ: TIBX), posted revenue of $255 million, up 11% from a year ago, for the quarter that ended in September. Earnings of $0.27 a share, minus items, were up 17% from last year. It was the 11th straight quarter of double-digit revenue and EPS gains.
For the second quarter, which ended July 31, Splunk reported a net loss of $4.58 million, or $0.05 a share, compared with a loss of $3.91 million, or $0.20, a year earlier. The loss excluding certain items was $0.01 a share, smaller than analysts’ average estimate for a $0.03 loss. Furthermore, the company has no patent protection.
If Splunk reports guidance below expectations on its next earnings report, it could cause a huge drop in stock price of between 10% and 30%. That's after the stock could experience a pullback leading up to and after its upcoming stock lockup expiration.
That’s right; Splunk’s lock-up period is ending soon amid aggressive insider selling, and on Oct. 15, 31 million new shares can be sold. On July 24, executives sold approximately 17 million shares of SPLK at $28.26 per share. That was a planned sale and is evidence that insiders are looking forward to cashing in their chips. On Oct. 15, employees will sell their shares on the open market, which will have a more detrimental effect on the share price.
The Bottom Line
One-product companies such as Green Mountain, Questcor, Pandora, and Zynga, had great valuations as a result of their amazing revenue growth. But they all ended up falling 60% or more once their one product got challenged.
Without constant innovation, a company can find profits elusive and growth strained. If Splunk employees are just looking to cash out, the company's performance is bound to get worse and investors will become disappointed. Therefore, Splunk is a good target for short sellers, because it is not going to fetch enough return for its investors’ hard earned money.
abirk has no positions in the stocks mentioned above. The Motley Fool owns shares of Oracle. Motley Fool newsletter services recommend TIBCO Software. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.