Splunk shares surge to record after rallying 16% in two days

Key Points
  • Splunk reports better-than-expected results late last week and gives an optimistic forecast.
  • An analyst at Argus Research wrote on Monday that Splunk is an attractive takeover candidate for big software companies.
  • The stock has surged past its previous record from July.
Doug Merritt, CEO, Splunk
Scott Mlyn | CNBC

Splunk's stock soared to a record, propelled by a two-day rally that began last week with better-than-expected earnings and continued on Monday after an analyst said the company is a prime acquisition target.

Shares of the data analytics provider climbed 5% to close at $147.64. The company, which went public in 2012, surpassed its previous record close from July.

Splunk said after the close of regular trading on Thursday that revenue in the fiscal third quarter rose 30% to $626.3 million, exceeding the $604.1 million average estimate, according to analysts surveyed by Refinitiv. The company also beat on earnings and provided a fourth-quarter sales forecast that topped estimates.

Having fully transitioned from a company that sells perpetual licenses for its software to a cloud-based provider with subscription services, Splunk increased its annual recurring revenue by 53%, a sign that it's generating more revenue dollars from investments in sales and marketing. That model makes it an attractive potential target for a number of big companies, wrote Joseph Bonner, an analyst at Argus Research, in a report on Monday.

"Although we are loath to play M&A roulette, we believe that Splunk is exactly the kind of company that could become an acquisition target for a larger enterprise software firm," wrote Bonner, who maintained his buy recommendation on the stock and has a $156 price target.

With its two-day surge, Splunk shares are now up 41% for the year, topping the 25% gain for the S&P 500.

Splunk said that strength in the quarter was driven by its public-sector business, which notched "several mid eight-figure orders" with federal government agencies. Jason Child, Splunk's finance chief, clarified that most of those deals are between $10 million and $20 million over three to five years.

"Data has emerged as the strategic asset, as more and more enterprises and government agencies around the globe are investing in data-centric digital strategies," CEO Doug Merritt said on the conference call with analysts.

In the third quarter, Splunk closed its $1 billion acquisition of cloud monitoring company SignalFx.

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