SPLK – Splunk Has Reached our Target Price

On Thursday February 15th, Splunk’s (SPLK-NASDAQ) share price closed at $96.35. With the Thursday close surpassing our target of $93, we recommend investors no longer purchase SPLK shares.

SPLK is not a FAANG play – Recall we launched our BUY recommendation on December 29th with the share price at $82.84. Our valuation is based on a fiscal Q1 2019 trailing 12-month free cash flow target. With the equity markets continuing to surge, our target was reached weeks before the company’s March 1st fiscal Q4 2018 earnings release. In comparison to other large cap tech stocks however, SPLK has a below average r-squared relationship with the NASDAQ Composite. Quarterly earnings and industry/competitor news move SPLK’s price to a larger than average extent. SPLK’s share price increase since our last report we believe has much to do with its September pricing decision and subsequent sales increases and insitutional investors increasing their holdings as a result. Rising equity markets money flows are also likely a major factor.

Sales force continues to matter – Recall we attempt to forecast revenue, earnings and cash flow through tracking Splunk’s sales force. We add up the sales quotas for all employed quota carrying sales people as well as those for anticipated hires. We attempt to incorporate the costs associated with the hires as well.

By excluding the impact of the salesforce, we believe the impact of demand for Splunk’s products and the enterprise data analytics market in general can be isolated.

What to watch for with fiscal Q4 2018 earnings – Our checks show that since the last earnings report, Splunk has had a difficult time filling a number of sales positions. The backlog of desired quota carrying sales people continues to grow. We expect this to have a medium-term impact on future Splunk sales. Splunk conservatively guides annual revenue, and we are keeping an eye on if the company will increase its fiscal 2019 guidance range.

For further details subscribers are encouraged to call us with any questions. Perspectec’s Full Research Coverage subscribers are entitled to our full financial model that tracks the entire sales force.

Example of some of the 800+ of Splunk’s sales force being tracked by Perspectec

Source: Perspectec and LinkedIn

Actionable Conclusion

We believe investors should hold on to the shares until at least Splunk’s fiscal Q4 2018 earnings release.

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