Splunk, Workday Shares Downgraded To Neutral At Citi

Growth stocks are “back in favor,” and most such shares have gained 40 percent from their February lows, Citi’s Walter H Pritchard said in a report. He downgraded the ratings on Splunk Inc SPLK and Workday Inc WDAY from Buy to Neutral, saying that they no longer represent enough upside versus their price targets of $62 and $87, respectively.

Analyst Walter Pritchard noted that both Splunk and Workday have the highest EV/sales and are growing faster than peers. He added that the shares of both companies are “under significant pressure to continue to justify multiples on the basis of pure top-line growth.”

Four Criteria For LT Value

Pritchard commented on four criteria that are important to long-term value:

1. Confidence in Numbers: Although there is significant upside in the positive case for Splunk, there is “inversely equal” downside in the negative case.
2. Long-Term Market Opportunity: Both Splunk and Workday should find it less challenging to grow in the core market, since they current have a very low market share. The analyst added, however, that while they have room to take share in the core market, “the forces of competition are at play and will impact how high share can go.”
3. Long-Term Profitability Potential: There is greater confidence in the long-term profitability of Workday and its SaaS model than that of Splunk.
4. Qualitative Factors: While the current competitive position of both Splunk and Workday is strong, the former faces long-term threats from infrastructure platforms, including cloud, and the latter faces medium-term challenges and is dependent on the success of Oracle Corporation ORCL and SAP SE (ADR) SAP in cloud HCM and financials.

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