Software solutions provider Splunk (SPLK) is known for its powerful technology that can process a diverse range of data in large quantities and generate valuable insights from them.
Recently, the company gave us a peek into its preliminary expectations for Q3 of fiscal 2022. Importantly, Splunk expects a 19% year-over-year revenue growth to $660 million, which is more than the Street’s estimate of $642 million. (See Analysts’ Top Stocks on TipRanks)
However, the highlight of this article is the sudden leadership transition that took place recently at Splunk, where the CEO for the last six years, Doug Merritt left the position. Graham Smith, former CFO of Salesforce (CRM), who also happens to be a board member, has been placed as interim CEO.
What Does the CEO Change Mean for Splunk?
A strong and stable leadership reflects on the company’s performance and upholds investors’ confidence in the stock of the company.
Keeping that in mind, management assured that the change does not reflect performance issues, and will have minimal near-term execution risk in Q4.
Nonetheless, Needham analyst Jack Andrews cannot help but find the abrupt change quite surprising because of various reasons.
Firstly, the fourth quarter is seasonally the strongest quarter for Splunk, and the change in top leadership was not expected during such an important quarter.
However, after discussing his concerns with management, Andrews seemed convinced that the change was not due to any fundamental weakness in the company, but rather, a step to ensure stronger growth in the future.
“Rather, the Board increasingly recognized during the FY23 planning stage that a different skill set will be required to drive SPLK from $3 to $10 billion and beyond,” he explained.
Andrews also opined that it would have been ideal if a new CEO was announced simultaneously with the resignation of the previous CEO, as it would have served the company and investor sentiments better.
His discussions with management indicated that Splunk is still in search of a CEO who has considerable experience in the cloud and has multi-dimensional expertise. On the same note, the analyst also reminded us that Merritt, despite possessing multi-dimensional skillsets, lacks in the most important required skillset of working on the cloud.
Nonetheless, the leadership change confusion did not deter Andrews from reiterating a buy rating on the stock with a price target of $203.
“We view Splunk as an industry leader with strong products attacking a huge market opportunity,” he argued.
Wall Street’s Stance
Wall Street analyst consensus is cautiously optimistic towards Splunk, with a Moderate Buy rating based on 19 Buys and eight Holds. The average Splunk price target of $185.09 indicates an upside potential of 32.1%.
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Disclosure: At the time of publication, Chandrima Sanyal did not have a position in any of the securities mentioned in this article.
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