Splunk Inc. – Data Storage and Business Intelligence Play

Splunk Inc. (NYSE:SPLK)

The software manufactured by Splunk Inc. is used to collect, correlate, analyze, monitor and secure machine data that is generated by websites, applications, mobile devices, servers etc.  The software provided by the company can collect and index data irrespective of its source and format. In April 2012, the company came out with Initial Public Offering at $17.00 per share. In the second quarter of 2013, license revenue was 68% of total revenue while service revenue contributed balance 32%.

INVESTMENT TRIGGERS

According to estimates of International Data Corporation, volume of digital information is expected to rise to 7.9 trillion gigabytes in 2015 from 1.9 trillion gigabytes in 2011. This will provide big potential market to the company as machine data is one of major segments of digital information.  The company is spending around 20% of its revenue in research & development and continuously upgrading its product features to enhance its functionality and improve the features. In October 2012 the company has launched recent version of its product Splunk Enterprise 5.  

VALUATION

As per DCF valuation model, intrinsic value of each share of the company works out to be $34.90 per share.  At WACC cost of 5.7% and terminal growth rate of 2%, we have computed value of equity to be $3,377 million. This value of equity consists of DCF stream of $840 million and terminal value of $2,196 million less net debt. WACC has been computed on the basis of risk-free rate of 1.74%, Beta of 1 and market risk premium of 4%.

INVESTMENT RISKS

The company derives all of its revenues from only one product, Splunk Enterprise, and is subject to risks of technical changes. The company does not have long operating history and faces competition from established players like HP, IBM, Google, Oracle and SAP. The business model of the company is also risky as it gets one-time revenue for perpetual license agreements of its software. Maintenance and support agreements are for specific term and clients are not under any obligation to renew their agreements after expiry of specified period.