Have Splunk Shares Hit Bottom?

Splunk (SPLK +0.00%) is one of the better-known big data companies, alongside the likes of Tableau Software (DATA +0.00%) and Qlik Technologies (QLIK +0.00%). Splunk shares have seen a spectacular sell-off this year, particularly in the last two months or so after they tanked 40%. That sell-off is undoubtedly one of the biggest in the tech sector this year, which prompts the question of whether the shares have found their floor or they still have some downside potential left.

It's important to note that the Splunk and Tableau Software sell-off has not been triggered by weaknesses in the companies, but rather by valuation concerns by investors who felt the shares had run too far too fast.

Splunk has not been suffering the blues alone. Tableau Software shares have lost more than 30% of their value since March, while Qlik Technologies, a more mature company than the other two, has seen its shares drop 20% year-to-date.

How Splunk and Tableau Software shares became so pricey
There are several reasons why Splunk and Tableau Software shares have become so popular with investors. Big Data is the buzzword at the moment, as the rapid growth of mobile technologies has triggered a data explosion. Companies are grappling with ways to make sense of all this data by organizing and interpreting it in ways they can use it to more narrowly target customers and grow their businesses in the process.

Splunk is widely regarded as a company that provides premier solutions for collecting and organizing large swathes of data, while Tableau Software is heralded as the market leader in the provision of powerful and intuitive visual analytics that display complex data in easy-to-grasp ways.

Both companies have been growing their top lines at a blistering pace:

Source: Company Filings

Tableau Software seems to have the edge here, and also seems to be doing a better job as far as bottom-line growth is concerned.

Source: Company Filings

How big is the Big Data market?
Macquarie Equities Research initiated coverage of Splunk, Tableau Software, and Qlik Technologies about a month ago. According to the firm, Splunk's core addressable market in 2014 is worth about $27 billion, based on three established markets in which the company competes, namely IT Operations, Enterprise Security, and Business Operations.

The firm, however, points out that Splunk is actually a platform that can be used for many diverse applications. For instance, many customers purchase the software intending to use it for specific functions, but frequently end up using it for other, quite often unrelated, uses.

The flexibility of Splunk as a platform was recently demonstrated when the company released an app for Microsoft Exchange. The new app provides real-time visibility into the health of the Microsoft Exchange environment, including features such as delivery components and supporting IT infrastructure.

Tableau Software's addressable market is potentially big too, when you consider that the company's visual analytical tools are regarded as best-in-class in the data visualization category. Moreover, the company recently announced a strategic technology alliance with Splunk that will leverage Splunk's machine data analytics with its visual analytics. The marriage between the two companies' technologies can potentially increase the popularity of their products with customers.

Qlik Technlogies plans to launch a visual analytic tool dubbed QlikView.Next later this year. It's difficult to tell how this will impact Tableau's Software products, but this could mean that competition in the space is heating up.

Have the share hit a bottom?
According to Morgan Stanley software analyst Keith Weiss, the 10-year EV/sales multiple for enterprise IT companies is around 8.7 times. The 10-year EV/sales average multiple for the high-growth software sector stands at 9.5 times. Splunk shares currently sport an EV/sales multiple of 12 times.

Although that might look a bit expensive, it's important to remember that Splunk is a high-growth company whose top-line growth for the last four quarters has exceeded 50%, compared to the industry average of 24%. Factoring in the high growth by using a growth-adjusted EV/sales multiple, the company's multiple should be around 15.2 times, suggesting that the company's shares are trading at a discount to their fair value.

Foolish bottom line
There are, of course, no hard and fast rules that can be used to determine whether or Splunk shares have found their floor or not. Judging from the company's fast growth, the shares look fairly priced. Investors are, however, advised to exercise due discretion when buying these, or any other shares for that matter.