Splunk (SPLK –NASDAQ)
Splunk is an internet software company that enables companies to gain real-time operational intelligence by analyzing their machine data.
Company History
On the heels of intense investor interest in vendors of cloud-based software applications, Splunk is up over 80% since its April IPO. Other cloud-based software companies are enjoying a similar level of price appreciation, with Workday (WDAY co-founded by PeopleSoft’s Dave Duffield) up 80% on its first trading day 10/12, ServiceNow (NOW doubled since June IPO), Palo Alto Networks (PANW up 50% since July
Reasons to Short Splunk
High valuation. Market is pricing stock at a premium in anticipation of positive reforms. The most expensive stock among the major IOCs, significant reform is necessary to justify current share price. I believe consensus estimates are inflated and expect to see downward revisions throughout this year.
Weak business model – Dependent on one product. Switching costs are very low for customers. Fiercely competitive environment with rapidly changing industry. A good company will have a strong moat, low competition, no obsolescence risk, and high operating margins. Splunk has none of these traits.
Insider selling -- PetroChina, like other majors, has undertaken an expansive capital expenditure program during the last decade, and they appear positioned to continue growing their spending in the next four years. Despite high spending, production is relatively flat, with no discoveries in many years. This is because PetroChina’s fields are old (1950’s) and mature, with difficulty of extracting oil increasing in recent years, and likely to increase gradually in the future. Return measuresfor this segment are likely to show continued deterioration.
Competitive business outlook -- Like many of the other super-major national integrated oils, PetroChina is essentially a (slowly) liquidating trust. Long term growth prospects are dismal. The cost structure has grown dramatically, while oil production is stagnant. Finding and development costs are up from approximately $5/bbl in to over $20/bbl. Production costs as grown dramatically, too, from approximately $5/bbl to $15/bbl. The cost of the marginal barrel of oil is up and going higher. IOCs are switching from oil to natural gas, despite rising oil prices and declining natural gas prices.
Even with the most optimistic of scenarios, stock is richly valued.
