At These Levels, Are Shares of Splunk an Opportunity Buy?

Source: Thinkstock

Source: Thinkstock

Splunk Inc. (NASDAQ:SPLK) is a provider of the leading software platform for real-time Operational Intelligence. The stock had rocketed higher in the last two years, up over 200 percent by early in 2014, but has since lost over 50 percent of its value. This is somewhat of a surprise given its customer base. In fact, this year the company signed more than 400 new customers, ending the quarter with more than 7,400 customers worldwide.

New and Expansion customers are from all parts of the globe and include: 99bill.com (China), Betfair (Australia), California Institute of Technology (Caltech), Chang Gung University (Taiwan), Constant Contact, Creative Artists Agency (CAA), Github, Hospital Corporation of America (HCA), Idaho State University, IDEXX Laboratories, LATAM Airlines Group (Chile), Living Social, Mentor Graphics, MindTouch, Ministry of Education (Taiwan), Ministry of Science and Technology (Brazil), Net Entertainment (Sweden), Net One Systems (Japan), Nexon (Korea), New York State Unified Courts, Norsk Tipping AS (Norway), Overstock.com, Survey Monkey, Taishin Securities (Taiwan), Telecom New Zealand, U.S. Department of Energy, U.S. Department of Health and Human Services, WEG Industries (Brazil), William Hill Australia. However, the Street is quite disappointed with the guidance the company gave, although the quarter was moderately strong.

Revenues were up huge year-over-year but the company is still losing money. Total revenues were $85.9 million, up 50 percent year-over-year. License revenues were $51.3 million, up 42 percent year-over-year. GAAP operating loss was $50.1 million; GAAP operating margin was negative 58.3 percent. Non-GAAP operating loss was $3.6 million; non-GAAP operating margin was negative 4.2 percent. GAAP loss per share was $0.43; non-GAAP loss per share was $0.04. Operating cash flow was $18.9 million with free cash flow of $14.7 million.

Godfrey Sullivan, Chairman and CEO stated, “We thank our customers for their enthusiastic support of our expanding product line. We are accelerating our investments in core technologies, cloud services and market specific solutions to better serve our global customers”

While the quarter was so-so, what is crushing the stock is that the company provided in-line guidance for its next quarter and for the entire fiscal year of 2015. Total revenues are expected to be between $92 million and $94 million. Non-GAAP operating margin is expected to be between negative 2 percent and negative 4 percent. One positive is that total revenues are expected to be between $402 million and $410 million. This is up from the $400 million per prior guidance provided on February 27, 2014. Non-GAAP operating margin is expected to be approximately zero. This is unchanged from the prior guidance. But that guidance for revenue of $402 million to $410 million is only in-line with a $406.9 million consensus.

After many quarters of guiding above consensus, investors wanted more and as such the stock is being hit hard. All things considered, after this pullback, I think Splunk stock may be an opportunity. The company was due for a period of simply meeting some expectations while surpassing others. The quarter was moderately strong and the guidance was slightly raised. Thus, I rate shares of Splunk as a buy and assign a $60 price target.

Disclosure: Christopher F. Davis holds no position in Splunk and has no plans to initiate a position in the next 72 hours.

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