Splunk Shares Are 'Poised For A Breakout,' Says Canaccord Genuity

Canaccord Genuity said Splunk Inc SPLK shares are poised for a break out after a strong quarter.

Quarterly Results

Splunk reported a strong quarter as revenue, operating margins and FCF came in ahead of expectations. The company recorded 318 orders over $100K, up 41 percent from last year and ASPs came in at the high end of the expected $40–50K range. The company is able to post this numbers is in a quarter that is seasonally weak for large deals.

"Investors are gradually coming around to our supposition that Splunk 1) is the leader in a comparatively less competitive segment, 2) the security push should keep revenue growth above 30 percent," analyst Richard Davis wrote in a note.

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"In our experience buying a software stock for less than1.0x EV/FCF/G is frequently a precursor to above market stock price returns," Davis added.

Rating, Estimates And Justification

The analyst estimates an EV/FCF of about 26x on C2017E, which is less than 1.0x the firm's growth rate.

Davis, who has a Buy rating on the stock, said Splunk "has marked time since late September 2014, the company has grown, and the multiple has compressed to an attractive level."

"Investors understandably move on and lose interest during these adjustment periods, but we believe the company and stock are worth looking at, and well, buying again," Davis noted.

Splunk raised its full-year revenue guidance by $16 million to $896 million (at the high end). Despite the revenue increase, non-GAAP operating margins were maintained at 5 percent, which represents a 120bps improvement year-over-year.

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Operating cash flow is still expected to be roughly 23 percent of revenue for the year, or $206 million based on the revised high-end of guidance. Davis expects over 400 bps of FCF margin improvement in F2018 as FCF returns to more normalized levels.

The analyst has raised his price target by $5 to $65.

"Splunk is now one of our favorite mid-cap growth names, and we'd use any derivative-driven weakness (PANW) as an opportunity to add to positions. Reiterate BUY," Davis highlighted.

At the time of writing, shares of Splunk were up 2.24 percent to $56.16.