Splunk stock jumped on Monday amid reports Cisco Systems made a $20 billion offer for the software company. But Cisco stock dipped as analysts mulled whether Splunk is the kind of transformational deal the computer networking giant needs.
The Wall Street Journal reported late Friday that Cisco had offered to buy Splunk, though the story said Cisco and Splunk do not appear to be in ongoing negotiations. Analysts believe Cisco needs to up its offer well beyond $20 billion to get Splunk to the bargaining table.
Splunk may prefer posting a solid quarter or two to drive up its asking price, BMO Capital Markets analyst Keith Bachman said in a note to clients.
"We can see why Splunk would reject such an offer ($20 billion) at this juncture," Bachman said. "If we assume the $20 billion takeover price is equity value, not enterprise value, this would equate to about a $125 share price. If Splunk's board and senior management believe that improving revenue and ARR (annual recurring revenue) growth as well as FCF (free cash flow) generation will happen during 2023, such an offer would appear low."
Splunk Stock: Cisco A Good Strategic Fit?
Splunk stock popped 9.1% to close at 124.97 on the stock market today. SPLK stock holds a Relative Strength Rating of 22 out of a best-possible 99. Meanwhile, Cisco stock fell 1.3% to 53.18.
With roots in data analytics software, Splunk has expanded into security. In addition, it's undergoing a transition to a software-as-a-service business model. Meanwhile, Chief Executive Doug Merritt stepped down in November and the role is being filled temporarily by board Chairman Graham Smith.
"The story at Splunk has been one with many twists and turns over the past several quarters," Jefferies analyst Brent Thill said in his note to clients. "Splunk has struggled with a combination of sales execution issues, lack of visibility amid an elongated cloud business model transition, and uncertainty at the helm with the company still actively searching for a new (CEO)."
He added: "Splunk has over $2.5 billion in annual revenue today and security represents half of the business. The other half of Splunk's business in observability would be a natural complement to Cisco's existing monitoring solutions (AppDynamics) and could better position Cisco as an end-to-end platform to compete with rising stars such as CrowdStrike, Datadog and others."
The biggest software acquisition by Cisco was AppDynamics for $3.7 billion in 2017.
Cisco Stock Earnings Due Wednesday
Private equity firm Silver Lake last year made a $1 billion investment via convertible debt in Splunk. That valued the company at $23 billion, Raymond James analyst Adam Tindle said in a note.
CSCO stock reports earnings on Wednesday. Splunk stock reports earnings on March 2.
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IBD offers a broad range of growth stock lists, such as Leaderboard. Investors also can create watch lists for issues such as Splunk stock, find companies nearing a buy point, or develop custom screens at IBD MarketSmith.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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