So many fads out there there days with cloud, SaaS and of course, Big Data being fads *insert extreme sarcasm here*.
“Data analysis software maker Tableau Software Inc forecast better-than-expected current-quarter revenue after reporting quarterly results that handily beat analysts’ estimates, sending its shares up 16 percent in extended trading.”
Some quick facts from this report:
- License sales of the company’s business intelligence software jumped 93 percent to $58.0 million, with existing customers contributing 66 percent of total license revenue.
- Tableau said it closed 179 sales orders of greater than $100,000 and added more than 1,800 customer accounts in the fourth quarter. The company now has 17,000 customer accounts.
- The company said it expects first-quarter revenue of $61 million to $63 million, beating analysts’ average expectation of $60.3 million, according to Thomson Reuters I/B/E/S.
- The company posted a net income of $11.2 million, or 16 cents per share, in the fourth quarter, compared with a loss of $1.1 million, or 3 cents per share, a year earlier.
- Revenue nearly doubled to $81.5 million.
Here is a look at the one year stock price performance:
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?
It looks as if ‘Big Blue’ (a.k.a. IBM) continues to make ‘Big Moves’ in big markets such as cloud computing and big data. The Companies’ fourth-quarter results were better than expected and Wall Street appears to like the direction and evolution of the Company.
Full article here:
The Company attributes the good financial results to their software businesses. “IBM beat Wall Street’s estimates in its fourth-quarter results, released after market close, boosted by strength in its software business.”
This transition from a focus on hardware, mainframes and computers has not simply happened overnight. Neither was it was not happenstance. The slow evolution to focus on software and services is still in its infancy, in my humble opinion, however the smart people at IBM are much further along than many other companies that are struggling to evolve their businesses. Take some of the most successful hardware companies of the past such as Hewlett-Packard and Dell in comparison, for example, and notice how they have fallen out-of-favor with customers and the investment community in general. HP is still debating whether or not to divest their personal computer business or not. Whereas, Dell is clearly trying to make the transition to higher margin software and services but their direction is not clear.
“We achieved record profit, earnings per share and free cash flow in 2012,” said IBM CEO Ginni Rometty in a statement released after market close. “Our performance in the fourth quarter and for the full year was driven by our strategic growth initiatives — growth markets, analytics, cloud computing, Smarter Planet solutions — which support our continued shift to higher-value businesses.”
While this seems promising for IBM in respect to their short-term financial strength it seems as though they are not being passive about their growth plans. They are aggressively going after high-growth, high-margin emerging market segments (including Big Data) and have been quite local about this as an important objective.
“Looking ahead, we continue to invest to deliver innovations for the enterprise in key areas such as big data, mobile solutions, social business and security, while expanding into new markets and reaching new clients,” added Rometty.
I find it humorous to hear all this buzz about big data, mobile and social. In particular I love when the nay-sayers discount these emerging markets as ‘hype’, or ‘a fad’ or ‘cannot monetize’. In fact, this incredible doubt by many people that these are viable markets for successful business was the whole purpose of creating BigDataIsAFad.com, CloudIsAFad.com and SaaSIsAFad.com.
If the likes of IBM, Google, Apple, HP, Amazon, Salesforce and others are investing billions and billions of dollars on these types of solutions, I have to think there is some legitimacy to these markets. Afterall, these companies all have enjoyed tremendous success at one time or the other.