As with many other tech stocks, Splunk Inc (NASDAQ:SPLK) has taken a hit lately. But this looks more like noise. Keep in mind that — for the past 12 months — SPLK stock is still up a sizzling 57%.
Now, the company does face some challenges. Perhaps the biggest one is the intense competitive environment. Let’s face it, there are many fierce rivals in the cybersecurity and real-time operational intelligence markets. Just some include CA, Inc. (NASDAQ:CA), Dell Software, Oracle Corporation (NYSE:ORCL) and SAP SE (ADR) (NYSE:SAP).
Another issue is that SPLK has yet to hit GAAP profitability. This is notable since the company has been around since 2003!
Oh, and yes, SPLK stock is not necessarily cheap either. Consider that the price-to-sales ratio is about 11.
However, despite all this, I still think a bullish case can be made for SPLK stock and that the latest drop in the shares presents an attractive entry point.
So let’s take a deeper look at the company:
Advantage #1 for SPLK Stock — Strong Platform
SPLK certainly has a powerful set of technologies, which allow companies to collect, search and monitor their data. Such features have been critical for not only cybersecurity but also business analytics, compliance, applications management and IoT (the Internet-of-Things). As a result, customers can improve service levels, mitigate risks, lower costs and improve decision-making.
The Splunk platform also does not require intensive setups to scour data. There are sophisticated systems to automate the process.
Granted, Splunk has been late to the cloud. But, interestingly enough, this has turned out to be an advantage. The reason is that Splunk’s technology can deal with hybrid environments, which is a must-have for many large organizations.
Advantage #2 for SPLK Stock — Growth
As seen with the latest quarter, SPLK continues to grow at a robust pace, with total revenues jumping by 37% to $420 million. The cloud has been a nice driver. For the past year, the revenues nearly doubled to $94 million. In fact, SPLK believes that they will hit $160 million for fiscal 2019 and that billings will be about $270 million.
The company has been able to generate strong operating cash flows too. For Q4, they came to $146 million. In all, there is $1.2 billion in the bank.
No doubt, SPLK has also seen quite a bit of uptake with customers, as there remains continued innovation in the product line. During the past year, there were 2,300 six-figure deals, 270 seven-figure deals and 10 eight-figure deals. Before this, there were only six eight-figure deals since the company’s inception.
And the growth is likely to continue for the long haul. According to the latest SPLK investor presentation, the addressable market is about $62 billion.
Advantage #3 for SPLK Stock — M&A Potential
Cybersecurity is a strategic priority for most companies. After all, a data breach can wreak havoc on a company, leading to higher costs and a tarnishing of the brand.
So, yes, major tech operators have been moving aggressively into the cybersecurity market, which has led to a surge in M&A activity. According to Momentum Cyber, there were $41 billion in deals during the past couple years.
OK, then, might this mean SPLK stock could be buyout bait? Well, I think it’s reasonable. The company has a customer base of over 15,000, a strong set of core technologies and is targeting various large market opportunities. The market cap on SPLK is also affordable, at $13.8 billion.
As Argus’ analyst Joseph Bonner recently noted, it is “exactly the kind of company” that would get the interest of a large tech operator. He also has a price target on the stock at $120, which implies 24% upside.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.