A Few Reasons Why Splunk, Inc. Should Continue Getting Better

After a weak start to the year, Splunk is making a comeback, and it should get even better.

Jul 7, 2014 at 1:32PM

Although data analytics player Splunk (NASDAQ:SPLK) got off to a weak start in 2014, it is making a comeback after reporting strong first-quarter results at the end of May. Splunk shares have gained 33% in the last month, despite dropping 17% after the earnings announcement. A solid guidance has triggered a resurgence in Splunk's stock price. In addition, its partnership with Tableau Software (NYSE:DATA) is reaping results. However, will Splunk continue its terrific growth, despite competition from IBM (NYSE:IBM)?

Product development to drive growth
Splunk's focus on product development has helped it grow revenue at a robust pace despite competition from bigger players. For instance, one of its products, Hunk, saw substantial traction during the first quarter. It added a new customer in the form of Vantrix, a provider of solutions to improve delivery of rich media content, along with a state and public health agency.

According to management, Hunk is witnessing solid adoption in the market because of three reasons: its powerful search and analytics language, its rapid deployment model, and its ability to analyze data without moving it. Splunk believes these three key features will allow Hunk to land more customers in the future. 

Splunk Cloud is also gaining momentum, bagging some impressive orders from the likes of IDEXX Laboratories and MindTouch. The company recently launched Splunk 6.1, equipping it with various new features. Its new capabilities include multi-site clustering and the ability to embed Splunk reports into other business applications. In addition, it also includes enhancements to easily build dashboards, perform drill-downs, and new things like chart overlays.

Splunk Enterprise won the Best Cloud Management Product Award at Cloud Pro's UK Cloud Awards. Customers are impressed by its ease of use, rapid deployment, scale, and apps, which ultimately add value. 

Splunk's focus on the security business is another expected catalyst going forward. Security was its largest segment in the first quarter, with more companies utilizing Splunk's solutions. The company is also seeing an increase in demand for its apps. Splunk received a large order for its security solutions during the quarter from a Fortune 50 company. Splunk believes that it landed this order due to the restricted nature of traditional security information management, or SIM, systems. Its solution allows customers to get visibility on all the data, more than what's inside the schema of a typical SIM.

Splunk is helping program developers improve code quality and reduce time to deploy new projects. According to a report from Red Hat, with the help of Splunk, its development team was able to reduce application error rates by two orders of magnitude in just a couple of weeks.

An important partnership
It is clear that Splunk is highly focused on improving its products, which is why it entered into a partnership with Tableau Software in March. As a result of the partnership, Tableau will be using Splunk Enterprise as a native data source in the latest version of its software, as Splunk's ODBC driver will play a key role in data mining in this tie-up. The Splunk partnership will allow Tableau's technology to enable users to visualize machine data and look for new insights.

In addition, Tableau is growing at a rapid rate. It added more than 1,800 new customer accounts in the first quarter and closed around 210 large transactions worth more than $100,000. So, this partnership can be beneficial for Splunk, as Tableau is a fast-growing data analytics player.

The IBM threat
It is important for Splunk to continue innovating, as it stands against the might of IBM in big data. IBM is focusing on equipping its Big Data products with smart, predictive, and cognitive capabilities. Its IBM SmartCloud Analytics Predictive Insights software intends to process high-scale machine data from servers, storage systems, networks, and applications into business intelligence. In fact, IBM's Predictive Insights has gained solid traction in the market, with customers such as Consolidated Communications using it to track 80,000 data streams, saving $300,000 per year. 

This illustrates the capability of IBM's products, and if they continue getting adopted by bigger enterprise players, then Splunk will feel the heat.

Splunk's valuation: Expensive but enticing
Being an early stage company, it is difficult to compare Splunk with established peers such as IBM and Oracle. The following table looks at the comparable metrics of Splunk and Tableau, both of which were founded in 2003, went public within a year of each other -- Splunk in 2012 and Tableau in 2013 -- and operate in the same industry.

Splk

Source: Yahoo! Finance

As a result, even though these Big Data analytics companies look expensive on a price-to-sales ratio basis, they are reporting robust growth in their revenue and are also cutting losses. In addition, their bottom line is expected to grow at a rapid pace in the next five years, ahead of the industry average of almost 20%.  Investors hunting for growth-stage companies should take a closer look at Splunk, and also Tableau, as spending on data analytics is expected to hit $54.6 billion by 2016, double of what it was in 2011.

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Mukesh Baghel has no position in any stocks mentioned. The Motley Fool recommends Apple and Splunk. The Motley Fool owns shares of Apple and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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