shares were trading sharply lower onTuesday after Morgan Stanley analyst Keith Weiss cut his rating on the data analytics software company to Equal Weight from Overweight, reducing his target price on the stock to $160, from $213.
As Barron’s outlined in a recent article, Splunk (ticker: SPLK) is working through several major changes in its business, shifting toward a subscription-based revenue model while gradually moving toward a focus on cloud-based versions of its software. Those shifts have caused some disruptions in the company’s growth rate.
In a research note, Weiss says that he expects “more bumps” ahead for Splunk. He notes that the company has the potential to exceed $4 billion in annual recurring revenue within the next three years, which makes the company’s $20 billion enterprise value “seem inexpensive.” But he adds that he sees multiple near-term challenges that are likely to “keep multiples depressed near term.”
He sees “lingering issues closing large deals,” increasing competition in the “observability” market, a software segment focused on monitoring the health of IT systems, and a “more challenging security landscape,” with increased competition in cyber analytics and a smaller boost from the recent Sunburst/SolarWinds hack attack than he had originally expected.
He adds that recent executive departures, including the exit of the chief technology officer, Tim Tully, as well as attrition among high-level sales representatives, “increased the execution risk” for Splunk.
In trading Tuesday morning, Splunk shares were down 4.8%, to $127.52. The stock is down about 25% for the year to date.
Write to Eric J. Savitz at [email protected]