In a very tumultuous year for high-growth software stocks, data analytics company Splunk (SPLK) has actually held up well. Its stock is up 10.6% on the year, while the diversified large-cap software sector as defined in the Invesco Dynamic Software ETF is down in the mid-teens.
SPLK year-to-date price returns (daily). Data by YCharts.
But that outperformance came on the heels of a dismal final two months of 2021, when the stock was down more than the market after CEO Doug Merritt abruptly resigned in November after six years on the job.
Moreover, the late-2021 plunge came after a year of underperforming the sector. Those longer-term headwinds were due to Splunk's difficult business transition away from on-premise deployments sold in perpetual licenses to recurring cloud-based contracts. All in all, Splunk remains 46% off its all-time high set back in the summer of 2020.
The transitions in the CEO and business model might be causing nervousness, but Splunk's leading platform in observability, cybersecurity, and IT data management has continued to perform, with the business maintaining strong underlying metrics. And 95 of the Fortune 100 continue to use more of its sticky platform to manage their technology infrastructure.
Meanwhile, on the recent earnings release, Splunk named a new CEO, and said it would be materially through its business transition by the end of this year. That inflection point is likely why several big-time investors are falling over themselves to buy Splunk's stock.
Image source: Getty Images.
This private equity firm made Splunk a rare public market buy
On March 4, private equity firm Hellman & Friedman disclosed a massive $1.39 billion purchase of Splunk, good for 7.5% of the company, making Hellman & Freeman Splunk's largest shareholder. That disclosure came two days after Splunk reported better-than-expected fourth-quarter results and named its new CEO, Gary Steele, the founder and former CEO of Proofpoint, a cybersecurity firm that was acquired last year.
Private equity firms usually take stakes in smaller, private companies that they can control and financially engineer. That's not the case here, and it's therefore very interesting that the firm thought publicly traded Splunk was worthy of such a large investment.
In a statement, Hellman & Friedman said: "Splunk is the leading enterprise data platform for cybersecurity and observability solutions, with tremendous continuing growth driven by rapid digital transformation around the world and the ever-increasing presence of cybersecurity threats. We are very enthusiastic about Gary's appointment to CEO and look forward to providing collaborative support to the Company as it works to enhance value for all shareholders."
The Hellman & Friedman buy follows other very interested parties
The unusual Hellman & Friedman purchase came on the heels of two other very interested buyers. Back in February, The Wall Street Journal reported hardware giant Cisco was interested in acquiring Splunk for "more than $20 billion." Of note, Splunk has since appreciated to just over a $20 billion market cap today. I had hoped that Splunk wouldn't sell at this beaten-down price, and it looks as if the two companies are no longer in talks -- likely due to a disagreement over price.
And all of this was preceded by a large investment from tech-oriented private equity firm Silver Lake Partners back in June of 2021. Silver Lake invested $1 billion in Splunk in the form of convertible notes, which pay a 0.75% coupon and are convertible to common stock above $160 per share. Silver Lake's chairman, Ken Hao, also joined Splunk's board. Yet even after its outperformance this year, Splunk only trades at $128 today.
Likely, Silver Lake didn't invest in Spunk to make a measly 0.75%; it probably expects Splunk's stock to go much higher than $160 over time.
Recent results
Splunk outpaced expectations on its recent earnings report, and gave fiscal 2023 guidance for about 22.6% revenue growth, which would actually be an acceleration from fiscal 2022's 20% growth. Operating cash flow is also expected to move upward to greater than $400 million, up from $128 million in the past fiscal year.
Additionally, Splunk's cloud business is growing at a much higher rate, up 70% in the last year, while making up only 35% of total revenue. Over time, that segment should grow faster than the total business, with management guiding for the cloud becoming a large majority of the business at maturity. As the segment makes up a larger portion of the business, revenue growth should maintain its current pace or even accelerate.
Consistent or accelerating revenue growth could pave the way for big gains in the years ahead -- likely the kind envisioned by the big-time investors Splunk is attracting.
