With a daily gain of 20.9%, a three-month gain of 11.03%, and a Loss Per Share of $0.33, Splunk Inc (SPLK, Financial) presents an intriguing case for value investors. This article seeks to answer the question: Is Splunk's stock modestly undervalued? We will delve into a comprehensive valuation analysis, providing valuable insights for potential investors.
Company Introduction
Splunk Inc (SPLK, Financial) is a cloud-first software company specializing in the analysis of machine data. The San Francisco-based firm is a significant player in the security and full-stack monitoring & analysis markets, with over 90% of the Fortune 100 using its solutions. Its revenue stems from the sale of software licenses, cloud subscriptions, and maintenance and support. With a market cap of $24.20 billion and sales of $3.80 billion, Splunk's current stock price stands at $144.59, compared to its GF Value of $174.5, suggesting it may be modestly undervalued.
Understanding the GF Value
The GF Value represents a stock's intrinsic value derived from GuruFocus' proprietary method. It is calculated based on historical trading multiples, an internal adjustment factor based on the company's past performance and growth, and future business performance estimates. The GF Value Line provides an overview of the stock's fair trading value. If the stock price is significantly above the GF Value Line, it may be overvalued, potentially leading to poor future returns. Conversely, if it is significantly below the GF Value Line, the stock may be undervalued, potentially leading to higher future returns.
For Splunk (SPLK, Financial), the current price of $144.59 per share suggests that the stock may be modestly undervalued. As such, the long-term return of its stock is likely to be higher than its business growth.
Assessing Financial Strength
Before investing in a company, it's crucial to evaluate its financial strength. Companies with poor financial strength pose a higher risk of permanent loss. Key indicators such as the cash-to-debt ratio and interest coverage can provide insights into a company's financial health. Splunk has a cash-to-debt ratio of 0.6, which is lower than 73.2% of 2750 companies in the Software industry. This suggests that Splunk's financial strength may be considered poor.
Profitability and Growth
Investing in profitable companies typically carries less risk. Companies with high profit margins often offer better performance potential than those with low profit margins. Splunk has been profitable 0 years over the past 10 years, with revenues of $3.80 billion and a Loss Per Share of $0.33 in the past 12 months. Its operating margin of -0.75% is lower than 57.36% of 2786 companies in the Software industry. This suggests that Splunk's profitability is poor.
On the other hand, growth is a critical factor in a company's valuation. Splunk's growth ranks better than 62.02% of 2412 companies in the Software industry, with a 3-year average annual revenue growth of 13.2% and a 3-year average EBITDA growth rate of 12.5%.
ROIC vs WACC
Another profitability indicator is the comparison of a company's return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business, while WACC is the rate that a company is expected to pay on average to finance its assets. Ideally, ROIC should be higher than WACC. For the past 12 months, Splunk's ROIC is -1.31, and its WACC is 8.7.
Conclusion
In conclusion, Splunk's stock appears to be modestly undervalued. Despite its poor financial condition and profitability, its growth ranks better than 55.43% of 2006 companies in the Software industry. To learn more about Splunk stock, you can check out its 30-Year Financials here.
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