Did Splunk's Q3 Pros Outweigh The Cons?

Splunk Inc SPLK reported Thursday its third quarter earnings, which showed strong growth and expectations for continued momentum.

The Analyst

BMO Capital Markets' Keith Bachman maintains an Outperform rating on Splunk's stock with a price target boosted from $71 to $83.

The Thesis

The highlight of Splunk's third quarter was a 38 percent billings growth, which came in ahead of the 31 percent average growth seen in the past two quarters, Bachman said in a note. In addition, the fourth quarter billings guidance appears conservative at 46 percent quarter-over-quarter growth compared to an average of 57 percent quarter-over-quarter growth over the past two years.

Splunk's momentum in the quarter was driven by Security, which accounted for 50 percent of the entire mix. This was "impressive and represented the first time we had heard such performance," the analyst said. The company also benefited from a strong federal quarter, improvement in the EMEA region, and large cloud deals.

Overall, Splunk's entire ecosystem is "resonating well" with customers but there is one negative aspect of the earnings report. Specifically, the company's fiscal 2020 guidance of $2 billion implies a 29 percent growth rate at that time which marks an acceleration from 25 percent in fiscal 2019. Investors have reason to be "cautious that Splunk can accelerate revenue growth in fiscal 2020."

Nevertheless, the analyst "liked a lot more than we didn't" in the earnings and guidance.

Price Action

Shares of Splunk gained more than 16 percent Friday morning and hit a new 52-week high of $80.90.

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