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Splunk Soars on Cisco Takeover Bid
Stock Analysis & Ideas

Splunk Soars on Cisco Takeover Bid

Software maker Splunk (SPLK) isn’t exactly a household name. However, when an actual household name like networking supplier Cisco Systems (CSCO) makes a takeover bid valued in the billions, it’s enough to make investors take notice.

Splunk is currently up over 8% in morning trading on Monday on the news, but is the stock worth buying in on? There is reason to be at least moderately bullish on Splunk, and Cisco’s possible buyout plans are just part of the equation.

The past year or so in SPLK’s stock price action can be boiled down to two big peaks and two big valleys. The company kicked off the year around $170 per share and held there until just after Valentine’s Day 2021. That was when the bottom fell out. The company went from around $170 to nearly break $130 in about three weeks’ time.

After plateauing around $130, a smaller spike let the company challenge $150. It didn’t last. By early June, the company nearly fell through the $110 mark. That started the company’s return to prominence, if only temporarily.

By the end of June, it cleared $140 again. Early September saw it challenge $160. By mid-October, it broke $160, and in November, it cleared $170 once more. That kicked off the second major valley. By the end of November, it had once more dropped to nearly break $110. That’s about where it’s been ever since.

The latest news gives Splunk a clear shot in the arm. Cisco’s planned buyout offer was valued at over $20 billion. Reports note that the offer was made recently, but the companies aren’t in active talks right now. Cisco wouldn’t respond to questions about the deal, and Splunk, for its part, noted that it wouldn’t “…comment on rumors or speculation.”

Wall Street’s Take

Turning to Wall Street, Splunk has a Moderate Buy consensus rating. That’s based on 16 Buys and eight Holds assigned in the past three months. The average Splunk price target of $161.57 implies 30.3% upside potential.

Analyst price targets range from a low of $120 per share to a high of $225 per share.

More than Meets the Eye

Granted, Splunk isn’t the kind of firm that most people have heard of outside of a small community of networking professionals. It’s not like Cisco, which has a much greater slice of the public’s perception. However, there is quite a bit to like about Splunk that would make it an attractive buyout target, particularly for a company like Cisco.

First, the numbers for Splunk are more than conducive to a buyout. As of just Friday, the company was trading much closer to its 52-week low than its high. It’s just barely trading above its lowest price targets, even with the recent run-up in trading today.

The average price target of $161.57 almost seems like a forlorn hope, let alone those highs calling for the company to break out over $220. Cisco stepping in now to buy the company is probably about the best price the company is going to get on a per-share basis. Especially now that the word has emerged—though it’s not official—that Cisco has some interest.

Cisco’s interest, after all, might well spark some interest from other companies in the networking field. After all, Cisco might get a competitive advantage out of buying Splunk, and that’s not exactly good news for the other firms in its sector.

Granted, Cisco has not had the best run of luck with its acquisitions. Recent word from Morgan Stanley, however, suggests the move would be positive for Cisco. Such a move would help “de-risk the model” and “help valuation,” noted Morgan Stanley analyst Meta Marshall.

Cisco, you see, has made its fortunes on the back of networking equipment. That’s great; after all, businesses need such equipment, especially as the aftermath of COVID-19 keeps a lot of places running a lot more remotely.

However, equipment is a tricky game by itself; there are ebbs and flows and times when places don’t need much hardware at all. It’s a point IBM (IBM) has been working on for some time now, and developing subscription services is a great way to offset the times of slower demand. Cisco is trying to develop that subscription base, and Splunk may be a good way to do so, ready-made.

The fact that Splunk’s dividend history isn’t actually a thing doesn’t hurt matters either; it’s one less obligation Cisco would have to meet while still getting a subscription platform going.

Concluding Views

The fact that Splunk is trading around its lows would make it somewhat attractive by itself. The fact that Cisco may have its eye on Splunk only improves the situation. With Cisco potentially eyeing the company for acquisition, others in the field may step in to head off Cisco’s potential advance.

A lot of what may make Splunk a big winner is up in the air. However, even without all the speculation, there’s still reason enough to consider Splunk as an acquisition for a balanced portfolio. I’m moderately bullish here; Splunk has a decent product line by itself, and if Cisco picks it up, things only improve from there.

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