Splunk – We Predict – Will Make A Splash

SPLK : NASDAQ : US$55.33
Target: US$62.00

Splunk software collects and indexes machine-generated big data coming from the websites, applications, servers,
and mobile devices that power business. The firm’s software enables organizations to monitor, search, analyze, visualize and act on massive streams of realtime and historical machine data. Splunk is headquartered in San Francisco, was founded in 2003
and has been public since April, 2012.All amounts in US$ unless otherwise noted.

Investment thesis
Big Data captures imaginations, but the more valuable insight is that Splunk has developed one of the leading plays, and only mid-cap public investment play, on something more interesting – helping companies understand what’s happening in their business. More specifically, that means discovering what’s happening and assessing the importance of recorded events – whether that is elevator run times, trains, routers or e-commerce customer activity.

In effect, Splunk is a critical infrastructure underlying “The Internet of Things.” The firm does this with best-in-class indexing, search and as of June an analytics engine for Hadoop. As a result, Splunk has an exceptionally large, rapidly growing
addressable market that, while notionally understood by investors (and reflected in a high valuation), is likely to produce a half decade or more of top decile revenue growth on a business that at scale should generate in excess of  30% operating margins. SPLK is not for the faint of heart, but we believe the scale of the long-term upside to this business is enough to support a BUY rating.
 Opening up a new market. Just about every software application creates log files, which is known as Machine Data. Until recently, accessing this type of data was cumbersome.
 Splunk has developed market-leading tools to give users access to this Big Data. The firm’s software indexes this data for quick retrieval, analysis and presentation in easy-to-comprehend visualization. The software displaces piece part efforts, custom code, and legacy tools from platform vendors.
Industry analysts tag the addressable market for Splunk’s software at more than $30 billion, and we estimate that this market is growing at least 20%.
Result: best-in-class growth among publicly traded systems firm. We
forecast Splunk to be able to grow at a ~35% pace through at least 2016
and at least 25% after that, through 2020. (conti


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