Splunk Undervalued After Selloff

Narrow-moat Splunk SPLK announced Nov. 15 that board chair Graham Smith has stepped in as interim CEO to replace Doug Merritt, who abruptly resigned after six years as president and CEO. While we are surprised, we think this leadership change will be smooth, as Merritt will maintain an advisory role with the company to facilitate the transition. With Smith having been a Splunk board member since 2011 and chair since 2019, we think his expertise will also help smooth the process. Given Splunk's strong position, we believe the firm will be able to attract a high-caliber leader. The stock is down 18% in midday trading as investors deal with Merritt's surprise exit just six months after CTO Tim Tully left the company. We are maintaining our $164 fair value estimate for now and think the sell-off is unwarranted. Splunk's fundamentals remain solid, and we therefore view the shares as attractive. Splunk also announced preliminary results for its third quarter. It now expects revenue of $660 million for its third quarter, up from $638 million at the midpoint of prior guidance. The company guided to cloud annual recurring revenue of $1.105 billion and total ARR of $2.825 billion. The updated ARR outlook falls within management's prior guidance. Lastly, management now expects non-GAAP operating margins for the third quarter to clock in at negative 14%, an improvement from negative 17.5%, the midpoint of prior guidance. This updated range leaves us with an upward bias to our estimates pending the full third-quarter release Dec. 1.

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