Splunk: The Google of Big Data

Thomas J is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you are anything like me, and I trust that you are given you are reading my article, you have been skeptical of all the pop and drop tech IPOs of late. I can assure you that Splunk (NASDAQ: SPLK) is not another brick in the crumbling wall of new companies to go public. Splunk’s IPO was expected to price in the $11-$13 per share range. Instead, it opened at $17 and skyrocketed to $35 before trading closed on Thursday. With a diversified client portfolio and the exploding Big Data industry, it is clear that Splunk is a massive investment opportunity even after an IPO bounce of 100%.

A while back I wrote an overarching piece on Big Data and I explained how IBM (NYSE: IBM) is the leader of the pack with $1.1B in Big Data Revenue in 2011. I also quoted Wikibon, a tech advisory shop, that hypothesizes growth in the Big Data Market from $5B this year to more than $53B in 2017. Employing a similar analysis as I did with IBM, lets take a look at Splunk’s Big Data Revenue.

<img src="/media/images/user_60/splunk-share_large.png" />

Assuming absolutely zero claw in market share (very conservative) and that Big Data will make up the same percentage of revenue, Splunk will be able to increase revenue 10 fold by 2017. That is some pretty serious growth for a company that has already enjoyed 80% year over year revenue increases the last 3 years. Splunk CEO Godfrey Sullivan boldy claimed that Splunk is the Google of Big Data. Kind of a ridiculous comment, but Godfrey knows what he is talking about. He was at the helm of data analytics firm Hyperion when they were acquired by Oracle (NYSE: ORCL) for $3.3B dollars. There is no doubt in my mind that Godfrey can steer Splunk to massive growth and possibly even an acquisition from a major player.

So what is the downside? 100% IPO bump scares the bejesus out of me. I am confident that Splunk is a real and viable business unlike Groupon, Linkedin and the laundry list of other lousy IPOs, but like any investment it is not without risks.

The company derives all of its revenue from one product.

This is listed in the IPO disclosure as a risk of the business when I actually believe it’s a strength. Do one thing and do it well. This should help deepen and widen what Buffett calls economic moat, the firm’s ability to increase switching costs and defend against rival products impeding on business. Splunk’s client list includes Bank of America, Comcast, salesforce.com and Zynga and is evidence enough of a diverse client portfolio.

 Further, Splunk will continue to expand into new industries. In total Splunk has customers across 12 industries. Its client portfolio includes 10 government agencies. Two weeks ago Obama green lighted a $200M investment in Big Data. As far as government contracting goes, $200M is peanuts, but the investment is a positive statement about the government’s commitment.

The company has a history of losses, and has yet to be profitable. Let's take a look at Revenue and the Cost of Revenue. 

<img src="/media/images/user_60/rev-and-cost_large.png" />

The cost as a percentage of revenue has decreased as the company scales its business, but R&D investment has soared from $5M in FY2008 to $14M in FY2011 as the company continues to hone its product to meet client requirements. Sullivan has said that R&D will be a heavy cost center as Splunk continues to evolve. The useful life of this investment promises to be long (for a tech company anyway) and should lead to financial viability in future quarters. Splunk’s pricing model will help beef up margins as the Big Data market expands. The model charges clients based on estimated data indexing capacity. As Big Data demand grows, so will the size of the datasets; if Splunk is able to continue to sell clients on this model the product will become even more lucrative.

That leads into my next concern: the market space is new and there is a calculated risk that it won’t expand. Obviously, I am sold on this market and the evidence is there that this is not a risk at all.  As mentioned, Splunk serves 12 industries and already has an impressive client list. Big Data will expand and demand for Splunk’s product will follow.

Let’s look at a mature player in the space. Teradata (NYSE: TDC) is a massive analytics firm and 10% of their 2011 revenue is attributable to Big Data.  This chart, compliments of Morningstar, shows that Teradata has been on an absolute tear this year versus a composite of US Markets.

<img src="/media/images/user_60/tdc-ytd-vs-mkt_large.png" />

I think Splunk is a slam-dunk. The firm has incredible leadership in Godfrey Sullivan who spent 11 years at Apple and took Hyperion public. The Big Data market is going to explode and Splunk’s product is well positioned in the space. Its diversified client portfolio will buffer Splunk from negative market conditions within an industry segment. May is an historically poor month for equities and there are enough market uncertainties to allow history to repeat itself. I would recommend watching Splunk closely over the coming weeks to possibly buy on a dip.

 


Motley Fool newsletter services recommend Apple, and Teradata. The Motley Fool owns shares of Apple, International Business Machines, and Oracle. Thomas Lavan has no positions in the stocks mentioned above. 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.

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