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Splunk Inc (SPLK): Stay Away From This Technology Stock

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One of the hottest topics in the technology world now is Big Data. As data sets grow by the second, companies are interested in utilizing these vast amounts of available information for decision making. Splunk Inc (NASDAQ:SPLK) is one of the companies that works in this tempting market. Splunk software collects and processes machine-generated data that comes from websites, applications, servers and networks. This software enables users to monitor and analyze massive amounts of both historical and real time data.

Splunk IncSplunk Inc (NASDAQ:SPLK) has recently reported its first quarter earnings, posting a net non-GAAP loss of $0.06 per share, in line with analysts’ estimates. The company’s revenue grew 54% year-over-year to $57.2 million. Splunk has lifted its total revenue guidance for full year, and now it expects to generate revenue between $266 million and $274 million. The stock is already up 61.13% year-to-date. Can Splunk Inc (NASDAQ:SPLK) continue its momentum?

Where would the growth come from?

Splunk Inc (NASDAQ:SPLK) states that its core business tends to be related to improving security and performance of applications and IT infrastructure. According to the latest Gartner report, the IT operations and management software market grew 4.8% in 2012. Worldwide IT operations and management software revenue totaled $18 billion. The growth of the sector is being restrained by the weakness of the world economy. Companies throughout the world are trying to optimize their costs, so IT budgets are either put on hold or cut.

The growth that Splunk Inc (NASDAQ:SPLK) has shown is great, but is it sustainable? Splunk trades at an enormous 390 forward P/E, so it must deliver growth or the stock would run into trouble. The company works with other IT companies to establish its product. Splunk has recently announced its Splunk App for Palo Alto Networks Inc (NYSE:PANW), which would enable users to use their big data to analyze risks and improve security. Palo Alto Networks’ main product is the Next-Generation Firewall, which protects companies’ networks against various cyber threats. Splunk would use the massive amounts of data generated by the firewall for investigation and visualization capabilities. The companies state that the analysis that took several days of manual labor would be completed in a fraction of time. Palo Alto Networks Inc (NYSE:PANW)’ partnership with Splunk could potentially give a boost to its firewall’s competitive advantage.

Palo Alto Networks trades at 110 forward P/E. These huge valuations are ordinary for cloud and big data-related businesses these days. In my opinion, this forms a potential bubble, because companies would have a hard time trying to meet massive growth expectations. That said, Palo Alto Networks has been growing at the same pace as Splunk. In its most recent report, the company reported a 54% revenue growth year-over-year.

salesforce.com, inc. (NYSE:CRM) is using Splunk software to mine large quantities of data. salesforce.com, inc. (NYSE:CRM) has over 500 users of Splunk dashboards. Salesforce.com, a cloud computing company that provides customer relationship management software, is trading at 67 forward P/E. Such valuation looks familiar to you, right? Salesforce.com is a big client with $25 billion in market capitalization. Its stock is almost flat this year, as investors try to judge whether the growth prospects outweigh the expensive stock price. Salesforce.com is the kind of the client that Splunk is looking for: a big company with massive data that tries to squeeze every penny from it. Salesforce.com really needs to squeeze pennies as it has recently reported a first quarter GAAP net loss of $0.12 per share.

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