SPLK, DATA, MKTO, NOW... Goldman Waiting On The Sidelines In Splunk, Tableau, Marketo, ServiceNow

• Shares of Splunk Inc SPLK and Marketo Inc MKTO are down 5 percent and 18 percent, respectively, year-to-date while shares of Tableau Software Inc DATA and ServiceNow Inc NOW are up 7 percent and 26 percent, respectively, over the same period.
• Jesse Hulsing of Goldman Sachs initiated coverage of all the four companies with a Neutral rating.
• The Emerging Software segment is expected to shift to a period of standardization, the report mentioned.

Goldman Sachs initiated coverage on the Emerging Software segment with an “Attractive” coverage view. The analysts see the sector shifting to a period of standardization, “characterized by bigger deals and middle majority adoption.”

“We favor businesses with low or improving customer acquisition costs and the potential to sustain
multiple years of cash flow inflection,” the report mentioned.

Splunk Inc

The target price for Splunk is $58. Analyst Jesse Hulsing believes that last year’s inflection in Splunk’s ASP was driven by increased cyber-security spending and the company’s efforts to make its horizontal platform as “consumable” as possible.

Hulsing believes that Splunk’s long-term growth prospects would be dependent on moving into non-IT use cases. Concerns about growing competition from direct open source and its impact on pricing in the long run cannot be ignored, the analyst added.

The increase in the percentage of Splunk’s license orders over the last three years, from less than 20 percent to more than 40 percent, has slowed down the company’s current revenue growth. But this has created a cushion that may help soften the pace of the company’s growth decay, the Goldman Sachs report noted.

Hulsing also expressed caution on the company’s fundamentals due to the presence of competitive and rapidly maturing open source alternatives.

Tableau Software Inc

The price target for Tableau Software is $99. The company’s growth prospects are driven by its bigger deals in the BI space, driven by Tableau Software’s mature next generation solutions and the growing number of users seeking BI access.

Although Tableau Software continues to be the leader in the BI market, its lead is narrowing, the Goldman Sachs report mentioned while adding, “Other solutions have made strides in closing the ease of use gap which helped establish DATA as the dominant share gainer in the market.”

The analyst mentioned that Tableau Software has one of the most efficient revenue acquisition models which should help it sustain operating margins even as its management makes aggressive investments to sustain growth.

Marketo Inc

The target price for Marketo is $28. The company’s growth prospects are expected to be restricted by the growing competition in the marketing software segment especially within SMB.

Although the company offers the best marketing automation solution in the enterprise segment, its growth has been hindered by mixed execution. While the company has witnessed improved bookings, following the appointment of a new head of sales in late 2014, its future performance may be restricted by a bookings headwind, the Goldman Sachs report mentioned.

Marketo’s customer acquisition costs have surged given the slowdown in the company’s growth and increasing competition. “This is concerning, and until corrected likely caps the pace of cash flow
Growth,” Jesse Hulsing stated.

“We are most bearish on MKTO, which we view it as having strong technology, but a mixed execution track-record and a negative competitive environment,” the report mentioned.

ServiceNow Inc

The price target for ServiceNow is set at $87. Although ServiceNow is operating in a friendly competitive environment, logo runway remains a concern area, the Goldman Sachs report mentioned.

“While NOW has only 605 of the Global 2000, its penetration in North America and EMEA (43%) is much
higher and the majority of the remaining Global 2000 is in APAC (which we view as less easy to address),” the report added.

ServiceNow’s long-term growth is dependent on the company’s ability to expand into adjacencies, such as IT operations, PaaS and other service management use cases. The company has established a 2020 operating margin target of 30 percent, against an estimated 9 percent achieved in 2015.

“The prospect of five years of consistent operating margin expansion on top of already strong cash flow generation should help NOW sustain a premium to the rest of our coverage, even as growth slows,” the report mentioned.