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How Splunk Is Using Acquisitions to Improve Its Cloud Computing Offerings

By Nicholas Rossolillo - Oct 21, 2020 at 10:00AM

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Splunk has a new cloud tool and went shopping to bolster that tool's capabilities.

Digital data and analytics firm Splunk ( SPLK -2.32% ) recently announced a number of innovations and updates to its platform, including the launch of a new set of tools called the Observability Suite. In tandem with the new product offerings, the data monitoring leader announced two new acquisitions to add to its capabilities.

After taking a closer look at these announcements, this long-term shareholder is pleased with the company's progress as a new digital era dawns.

Leveraging past acquisitions with new ones

Booming data analytics demand, driven by the adoption of cloud computing over the last few years, has created a new dynamic in the industry. The field is awash with new firms like Datadog ( DDOG -3.08% ), Elastic ( ESTC -4.74% ), and others trying to capitalize on the opportunity. Even Splunk has had to make some adjustments. As it got its start in an era that predates modern computing technology, it too has been undergoing its own cloud-first evolution.

Someone holding a tablet. Charts and other data are illustrated above the screen.

Image source: Getty Images.

But its new strategy prioritizing the cloud -- both with the updated tool kit it offers to customers and with billing for use of its software -- is well underway. The new Observability Suite stitches together its infrastructure, digital experience (the interaction between a user and an organization), application performance, and incident response and investigation monitoring tools into a singular platform. Many of its next-gen capabilities for cloud- and multi-cloud based operations were acquired from infrastructure software outfit SignalFX about a year ago, and build on Splunk's existing data parsing software. 

Observability Suite is geared toward larger organizations in need of multiple data applications. And given the 50% year-over-year increase in annual recurring revenue (ARR) in Q2 -- driven by an 89% gain in cloud software ARR -- this bodes well for Splunk's continued momentum. And to bolster Observability Suite, two new acquisitions were announced: The first is Plumbr, an application and user monitoring outfit, and the takeover of the small software company is already complete. The second was the announced plan to acquire Rigor, a digital experience monitoring and optimization tool. 

Both purchases were for undisclosed (and thus likely very small) sums, and are not nearly as dramatic as the $1.05 billion takeover of SignalFX last year. Plumbr and Rigor could nonetheless be big deals if they strengthen the Observability Suite against the myriad of competitors nipping at Splunk's heels.

The best value and an enduring growth story

Splunk stock is up over 40% in 2020 to-date and currently trades for over 14 times current-year expected revenue. This is a discount to some of its smaller peers though, a disparity that's likely the result of Splunk making operational changes for the new cloud era. 

But it's a value I continue to purchase. Splunk's free cash flow burn (negative $157 million through the first half of the year) is bottoming out and will likely return to positive territory next year. And the company had $2.08 billion in cash and investments and $2.25 billion in convertible debt on the books as of the end of July. It isn't a squeaky-clean balance sheet, but the heavy spending and remaining ample liquidity have positioned Splunk to not only maintain its data analytics lead but also maintain its growth. As a reminder, management had previously forecast ARR to reach $4.6 billion by the calendar year 2022. The current ARR through the last quarter was just $1.9 billion.

It's a lofty bar the company has set for itself, but adding Plumbr and Rigor to its new cloud data suite of tools will do its part to help. I for one am happy to remain a stakeholder in Splunk's journey.

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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Stocks Mentioned

Splunk Inc. Stock Quote
Splunk Inc.
$114.21 (-2.32%) $-2.71
Elastic N.V. Stock Quote
Elastic N.V.
$112.67 (-4.74%) $-5.61
Datadog, Inc. Stock Quote
Datadog, Inc.
$164.22 (-3.08%) $-5.22

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