We expect Splunk Inc. (SPLK) to beat expectations when it reports first-quarter 2014 results on May 30.
Why a Likely Positive Surprise?
Our proven model shows that Splunk is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings ESP (Read: Zacks Earnings ESP: A Better Method), which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is at +16.67%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank #3 (Hold): Note that stocks with Zacks Ranks of #1, #2 and #3 have a significantly higher chance of beating earnings. The sell rated stocks (#4 and #5) should never be considered going into an earnings announcement.
The combination of Splunk’s Zacks Rank # 3 (Hold) and +16.67% ESP makes us very confident in looking for a positive earnings beat on May 30.
What is Driving the Better-Than-Expected Earnings?
Innovative product pipeline, customer wins, higher renewal rates and expansion into new markets are expected to drive a positive earnings surprise in the first quarter.
Although Splunk lagged the Zacks Consensus Estimate by an average of 91.7% over the last four quarters, estimates have moved a couple of cents upward over the last 30 days. The positive trend is due to the expectation that Splunk’s top line will continue to benefit with strong core market demand and new product introductions.
Other Stocks to Consider
We also see likely earnings beat coming from three industry peers:
Pegasystems Inc (PEGA), Earnings ESP of +14.29% and Zacks Rank #1 (Strong Buy)
Advent Software (ADVS), Earnings ESP of +7.69% and Zacks Rank #2 (Buy)
Yahoo! (YHOO), Earnings ESP +3.85% and Zacks Rank #2 (Buy).
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