Splunk is now in position to deliver “mid-teens” increases in annual revenue after a management overhaul that began 18 months ago, according to Jefferies. Analyst Brent Thill maintained his buy rating on the software platform and a price target of $140, implying 20% upside from Monday’s close, but said the stock could rally as high as $160 under Jefferies’ most bullish scenario. “Splunk’s growth prospects and addressable market are vast, particularly in the enterprise segment of the market that it addresses,” Thill wrote in a note on Tuesday. “[T]he company is making progress with its new pricing model, with metrics indicating uptake of workload-based pricing in recent quarters. We expect accelerating top-line metrics as the company enters the final stages of its business model transition process over the next 24 months.” Splunk’s revamp started in March 2022 when Gary Steele was named CEO. Steele previously served as CEO of Proofpoint, a security-as-a-service provider. Splunk’s prior management travails “clouded the true growth and earnings power” of the company. Splunk had shifted to an annual invoicing model in fiscal 2020 that led to negative free cash flow for several years, and later changed again to a cloud model that led to negative operating margins in fiscal year 2021 and fiscal year 2022, according to the note. “With these transitions now largely over and a new mgmt team in place, the financial model is now more straightforward,” Thill wrote. New management, fresh strategy and the involvement of activist investor Starboard Value since October 2022 should all lead to improved investor sentiment, the analyst said. Starboard took a stake in cloud-based software company Salesforce at the same time as it invested in Splunk, helping to keep costs in line, rationalize expenses and ensure proper capital allocation. “The focus at SPLK has noticeably shifted in the last year towards profitable growth while exercising disciplined expense management,” Thill said. “As top-line growth stabilizes at scale, we believe the larger opportunity for Splunk lies in improving operational efficiencies and profitability,” Thill wrote. “In particular, we believe there is room for [free cash flow] margin to reaccelerate starting in FY24 as the company steers away from short-term cloud targets and doubles down on security + hybrid cloud.” Shares in Splunk, which reported second quarter earnings last week , have climbed 36% so far in 2023 after plunging in both 2021 and 2022. — CNBC’s Michael Bloom contributed reporting.
