While past revenue is never an indication of potential future revenue, stock market investors continue to place a solid bet on Big Data analytics software maker, Splunk. In this article we will explore some reasons investors like Splunk so much, we will outline some potential investment risks and provide some comparison to other companies just to gain a little perspective on what Splunk has achieved in a fairly short amount of time.
What is the simple explanation Splunk from ones’ personal experience?
Splunk is a software product that I personally really enjoy using. It’s easy to use, they offer free trials for various versions and they offer it the way that everyone can simply consume (on-premise or as-a-service). In a nutshell, Splunk allows you a flexible, intuitive way to gather, organize and visualize all your Machine Data. According to their website:
Using Splunk Software, you can:
- Troubleshoot problems and investigate security incidents in minutes
- Monitor your end-to-end infrastructure to avoid service degradation or outages
- Gain real-time visibility and critical insights into customer experience, transactions and behavior
- Make your data accessible, usable and valuable across your organization
Let’s take a look at some of the financial numbers for ticker symbol SPLK (http://finance.yahoo.com/q/ks?s=SPLK+Key+Statistics) at the time of writing this blog (8/30/2013). Note: These numbers will certainly change so it will be interesting to see what happens.
- Yearly Revenue: $218.96 million
- Gross Profit: $177.52 million
- Quarterly Revenue Growth (YoY): 53.8%
- Profit Margin: -14.77%
- Shares Outstanding: 103.81 million
- Current Stock Price: $55.24 per share
- Market Cap Valuation: $5.73 BILLION
Now, some personal commentary on these numbers. First, 53.8% YoY growth is absolutely impressive and this stands out as a key reason why stock market investors continue to buy shares in the Company. Second, $177M profit on $218M revenue means that Splunk is in a high-margin market segment (Big Data) and is also executing well from a profitability stance. An 81% gross profit margin is absolutely insane and unheard of.
While the growth and profit numbers are impressive it’s important not to get too far ahead of ourselves because there are real financial risks. With all the good numbers I just described, you will notice that the Profit Margin listed above is actually -14.77% so you might be asking yourself ‘how can this be?’ Simply put, Splunk is aggressively investing in the future, and therefore, is less concerned about the short-term profitability of the Company and growth is the key objective. When a software company like this is in growth mode they are doing things such as hire talented workers, execute many sales and marketing campaigns as well as invest in building more and better technologies.
The other number that is somewhat of a concern is the $5.73 BILLION Market Capitalization Valuation. This is not to say that it’s undeserved, just that it should be justified. Market Cap Valuation is based on a simple calculation of Shares Outstanding (103.81M) times Current Stock Price ($55.24) which results in $5.73B for Splunk as of today. This basically means that at Splunk’s current Yearly Revenue of $218M it would take them roughly 26 years to achieve what the stock market has considered the ‘value’ of the Company. While there are surely many other factors to consider when it comes to determining a company’s valuation, I just wanted to point out this startling number because it’s an indication of clear interest by investors in bright potential future of either the Company and/or the market segment itself.
Market Cap Valuation comparison to other industry icons
Just for fun let’s compare two long time industry icon companies and where Splunk ranks among the others from strictly a Market Cap Valuation standpoint.
One, Eastman Kodak Company. You will know them as the famous photo film manufacturer founded in 1880. They have admittedly fallen into crisis mode having filed Chapter 11 bankruptcy in 2012, but again, this is just for fun to compare Market Cap to give your perspective how the stock market investment community feels about these respective companies.
Eastman Kodak Company (EKDKQ) key statistics:
- Yearly Revenue: $3.97 billion
- Shares Outstanding: 272.78 million
- Current Stock Price: $.05 per share
- Market Cap Valuation: $14.18 million
- 13,000 employees
SPLK $5.73 BILLION versus EKDKQ $14.18 million in Market Cap Valuation. Isn’t that amazing? Also, notice that even on Yearly Revenue of nearly $4 billion the Market Cap is incredibly low.
Next, Federal National Mortgage Association (a.k.a. Fannie Mae). Founded in 1938, Fannie Mae is a company at the heart of our financial system who provides securitized mortgage loans to other lending institutions. Most long-term mortgage loans such as the 30-year can be traced back to FNMA in one form or another.
Fannie Mae (FNMA) key statistics:
- Yearly Revenue: $32.26 billion
- Shares Outstanding: 5.74 billion
- Current Stock Price: $1.22 per share
- Market Cap Valuation: $7 billion
- 72,000 employees
Even though Fannie Mae has a Yearly Revenue of $32.26 billion the stock market has this Company valued at less than one-quarter this yearly revenue number at $7 billion.
Market Cap isn’t everything but investors typically are forward-looking
There are many sorts of investors whether they are long-term (buy and hold stocks for years), short-term (hold for weeks or months) or even day-traders. So this is not to say that Splunk is a good company simply because the overall investor community has priced-up their stock so high. Neither is this to say that neither Kodak nor Fannie Mae cannot reclaim their once iconic status in the eyes of investors simply because of their respective low Market Cap’s. However, high market caps and continually growing stock prices are fairly good indicators of a Company that is doing a lot of right things and Splunk seems to be hitting on all cylinders.
Is Big Data the next Big Thing?
In summary, when starting a business of any kind it’s critically important to choose the right market if you plan for impressive growth. In reflection, Kodak made absolutely the right choice to enter the film business in the late 1800’s and was certainly most successful for many decades. Also, Fannie Mae was one of the most profitable companies in the world when they were established in the late 1930’s to service the mortgage loan business and they, also, experienced quite prosperous times for many decades. And, while this might be a truly getting ahead of ourselves I ask you, is Splunk (and the Big Data market segment in general) the next Big Thing?