Analyst Note| Nupur Balain |
Narrow-moat Splunk reported weaker-than-expected third quarter results that fell short of both our and S&P Capital IQ consensus estimates. Even though the cloud transition continues to be a success, pandemic-linked macroeconomic factors and the revenue recognition impact of the shift to the cloud dampened top-line results. Due to business conservatism linked to economic uncertainty, several seven- and eight-figure deals that Splunk expected to book in the third quarter were pushed into the next quarter and beyond. Management pointed to external macroeconomic factors rather than weaker sales execution or loss to a competitor as the main cause of this delay in bookings. Even though Splunk has closed a few of these deals early in the fourth quarter, there still remains a degree of uncertainty about the timing of closing other remaining deals. Due to pandemic-linked uncertainty, management also withdrew long-run annual recurring revenue, or ARR, guidance. In spite of near-term headwinds, our long-term outlook remains unchanged as we expect Splunk to still be able to execute on its cloud strategy and continue to develop its holistic platform to expand use cases and generate healthy user growth. As a result, we are maintaining our fair value estimate of $208. With shares down as much as 19% after hours to $168, the sell-off might offer investors an attractive margin of safety.