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Splunk Isn't Done With Acquisitions Yet

By Steve Symington - Sep 26, 2019 at 4:48PM

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It has 10 acquisitions in four years, including two in recent weeks. And it's just getting started.

If you were among those bearish investors concerned about the aggressive acquisitions by Splunk ( SPLK -2.32% ) in recent weeks, the operational intelligence platform specialist has good news and "bad" news for you.

Splunk stock fell hard last month after the company posted strong second-quarter results but left investors worried about its significantly reduced cash flow expectations (due to its shift toward a recurring subscription model), and dilution from its $1.05 billion deal (60% cash, 40% stock) for cloud-monitoring company SignalFX.

If that wasn't enough, Splunk followed less than two weeks later by announcing its acquisition of stealth-mode software-as-a-service specialist Omnition -- though this latest purchase apparently was much smaller, since financial terms weren't disclosed.

All told, Splunk has made a whopping 10 acquisitions over the past four years.

Man holding case with money flowing out of it.

Image source: Getty Images.

The "bad" news

Splunk isn't planning on reining in its acquisitive spending anytime soon.

Speaking about Splunk's new $100 million venture capital fund in a Bloomberg interview last week, CEO Doug Merritt explained:

We are actively always looking for additional technologies that can add to our fold and help our customers. I would anticipate that there will be more [acquisitions] in the future. ... We see so much opportunity -- we're truly at the beginning innings of this data era. So whatever it takes, organic or inorganic, to make sure that our customers' needs are solved and they can actually turn data into "doing," and not just be overwhelmed by it, is something that we're committed to.

To be clear, regardless of its negative cash flow and lack of sustained profitability under generally accepted accounting principles, Merritt is saying Splunk will continue to acquire complementary businesses as it sees fit. And depending on the size of those future acquisitions, I suspect Splunk shareholders will be in for more knee-jerk reactions from the market as they come to light.

The good news

Splunk is not making these acquisitions from a position of weakness.

During its most recent quarterly conference call last month, Merritt elaborated on its stance by describing the two kinds of merger-and-acquisition transactions: "consolidation deals in troubled market categories," and "acceleration deals in growth categories."

In particular, he insists that Splunk's acquisitions belong firmly in the latter category -- that is, it makes its purchases not to prop up a fledgling business, but rather to complement its existing product portfolio and accelerate its market leadership in (as Merritt put it in the Bloomberg interview) these early stages of the data era.

To be clear, accepting Merritt's view takes a certain level of trust in management and a belief that Splunk's platform will sustain the enviable momentum it's enjoyed in recent quarters.

But consider Splunk's habit of underpromising and overdelivering with its quarterly results for each of the past several years -- and note that the platform's shift to a renewable, cloud-based model is currently happening far faster than any industry watcher has anticipated. Based on those two factors, I tend to want to give the benefit of the doubt to management's strategy for extending market leadership and sustaining top-line growth. As the effectiveness of this approach becomes more evident to Splunk's skeptics, I continue to think the pullback will prove to be an attractive buying opportunity for long-term investors.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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