Should You Buy Splunk (SPLK) on FQ1:19 Stock Pullback? Mizuho Weighs In

MIzuho's Abhey Lamba spotlights meaningful cash flow leverage from Splunk despite a weaker billings metric in the FQ1:19 print.


Splunk (NASDAQ:SPLK) may have exhibited first fiscal quarter results for 2019 that beat out its own guide as well as consensus estimates, but investors were less than impressed with billings growth. The Street has sent SPLK shares slipping roughly 4% in pre-market trading in lieu of the billings metric falling to 18% in growth.

Mizuho analyst Abhey Lamba sees a buying opportunity on SPLK share weakness, continuing to back the enterprise software player, whose “story remains intact.” In fact, the analyst spotlights upside potential to the guide over the short-term.

On the heels of the print, the analyst reiterates a Buy rating on SPLK stock with a $120 price target, which implies a 6% upside from current levels. (To watch Lamba’s track record, click here)

For the first fiscal quarter of 2019, SPLK posted $139 million in license revenue, marking a 36% year-over-year rise, and $312 million in total revenue, indicating a 37% year-over-year surge for the enterprise software player. Notably, the Street had set expectations for $128 million in license revenue from Splunk along with $297 million, with the company yielding a beat for the quarter. Between license and cloud, software revenue shot up 44% year-over-year to $173 million, with cloud line yielding 89% in gains on back of hybrid deployment uptake. Regarding profitability, some trajectory in top-line upside lifted margins a bit ahead of the guide of (6%). Another positive of the print was CFFO, which also translated to an outclass for the tech company.

Moving ahead to full year fiscal 2019 expectations, the SPLK team bumped up its revenue guide by $20 million up to $1,645 million, compared to consensus of $1,629 million. Worthy of note, roughly $15 million of the upside stems from the first fiscal quarter outclass. Additionally, the SPLK team maintained its margin guide of around 11.5%, suggesting an organic boost considering the revised target includes Phantom acquisition expenses, as well as its free cash flow outlook.

Lamba writes, “Splunk reported results that came in above guidance and consensus, though, the billings metric came in somewhat light. Demand trends appear to be intact with strong growth in large deals. Mgmt. raised its full-year outlook and we believe there remains ongoing conservatism in updated targets (particularly on the cash flow front). We remain buyers on the pullback given our view of a premium software asset with significant cash flow leverage over time.”

In terms of billings growth, the analyst acknowledges, “Although mgmt. continues to de-emphasize the metric, it is likely to remain in focus for investors in the very n-t.” Management comments showcased 43 deals worth more than $1 million compared to 35 deals in the same quarter this time last year on sustained expansion activity within the installed based coupled with rising new net activity. Customer adds for the quarter hit ahead of 460 “have yet to accelerate,” although the analyst notes enthusiasm from the SPLK team to achieve fiscal 2020 customer metric expectations. Strides forward on this metric are crucial, explains the analyst, as most of the company’s revenues from the installed base are realized here. The analyst adds, “Management has undertaken some initiatives to accelerate new customer signings but we have yet to see results.”

“Overall, the story remains intact. We see significant scale in the business with potential for growth investments to yield better productivity as reps ramp. Valuation remains at the upper-end; however, we think SPLK remains a best-in-class asset with limited competition,” contends Lamba.

TipRanks indicates Wall Street is upbeat on SPLK’s market opportunity. Consider that 28 out of 29 analysts polled in the last 3 months are bullish on the stock with just 1 playing it safe on the sidelines. With a return potential of nearly 3%, the stock’s consensus target price stands at $119.48.

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