Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

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

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.

Bottom line

It is easy to grow when you are small. As you get bigger, things become increasingly difficult. For example, Salesforce.com’s trailing revenue for the last twelve months was $3.25 billion. The company has delivered a 28% first quarter revenue growth in comparison with the previous year. Splunk’s revenue is not projected to exceed 300 million in the coming year. However, given the current valuation, Splunk would have to grow its revenue for several billion dollars. I think it would be difficult to do this fast. The market has grown slower than 5%. The economic situation is still fragile, and businesses are cautious about their costs. I think that Splunk is overvalued, and the stock would be punished when the investors realize that growth is not as big as they expected.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com.

The article Stay Away From This Technology Stock originally appeared on Fool.com and is written by Vladimir Zernov.

Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.