Splunk vs Elastic: Which Tech Stock Offers Higher Upside Potential?

2021 began with a sell-off on the first trading day, but that won’t deter investors from looking for attractive additions to their portfolios. Several stocks in the tech sector touched record highs last year as the pandemic further increased our reliance on technology. Remote working, virtual learning and e-commerce drove the demand for online tools, thus triggering rapid sales growth for several tech companies.

Does Wall Street expect the growth streak to continue? We will discuss analysts’ sentiment on Splunk and Elastic and use the TipRanks Stock Comparison tool to pick the better investment opportunity.

Splunk (SPLK)

First up is Splunk, which offers an array of solutions, including data analytics and monitoring, security and observability. Its growth over recent years has been supported by the organic expansion of its software offerings as well as tuck-in acquisitions. The company has transitioned to a subscription-based revenue model from the conventional perpetual licenses model.

Splunk shares took a major hit on Dec. 3 when it delivered lower-than-anticipated 3Q FY21 (ended Oct. 31) results and a weak outlook. The company’s 3Q revenue plunged 11% year-over-year to $559 million as an 80% growth in the cloud services revenue was more than offset by a 36% decline in its license revenue.

The company blamed the 3Q performance on challenging macro conditions that led to a lower-than-normal close rate on its largest deals. Splunk slipped into an adjusted loss per share of $0.07 from an adjusted EPS of $0.58 in 3Q FY20.

On the bright side, management highlighted that the company’s annual recurring revenue (ARR) grew 44% in 3Q and crossed the $2 billion milestone. Also, Splunk now boasts 444 customers with ARR greater than $1 million. As per the company, its cloud ARR growth rate of 71% was “among the highest growth rates in the industry.”

Despite the 3Q disappointment, Rosenblatt Securities analyst Blair Abernethy initiated coverage of Splunk with a Buy rating last month, with a price target of $196. The analyst acknowledges the company’s leading position in various key, rapidly growing IT operations segments.

Abernethy believes that Splunk is well-positioned to take advantage of the secular shift from “monolithic enterprise applications towards dynamic multi-cloud IT infrastructure.” (See SPLK stock analysis on TipRanks)

He noted that given Splunk’s rapidly expanding suite of integrated products, its total addressable market (TAM) has grown significantly over recent years to $81 billion. That figure includes a market opportunity of $17 billion in observability/DevOps, $17 billion in security and compliance, $28 billion in IT operations and $19 billion for the platform. Currently, the company’s ARR represents just about 2% of the TAM.

Abernethy expects Splunk to deliver 38% ARR growth in FY21 and 34% in FY22. Finally, he pointed out that with an EV/S (enterprise value/sales) multiple of 12.1x (based on FY21 sales estimate), the stock’s valuation stands at the low end of comparable high growth enterprise software vendors.

Turning to the rest of the Street, 18 Buys, 10 Holds and 1 Sell add up to a Moderate Buy analyst consensus. Given the modest 4.6% rise in shares over the past year, the average price target of $205.74 indicates an upside potential of 27.3% from current levels.

Elastic N.V. (ESTC)

Enterprise search and data analytics company Elastic looks quite small compared to the tech giants but its rapid pace of growth is attracting Wall Street’s attention. Aside from its search tools, the company is also gaining traction through its observability and security solutions.

Elastic had 12,900 subscription customers as of 2Q FY21 (ended Oct. 31), reflecting 33% year-over-year growth. It currently has over 650 customers with an annual contract value of more than $100,000.

Like several other tech companies in the growth phase, Elastic is not profitable yet. That said, robust revenue growth is helping in trimming down its losses. In 2Q FY21, the company brought down its adjusted loss per share to $0.03 from $0.22 in 2Q FY20, thanks to a 43% gain in revenue to about $145 million. (See ESTC stock analysis on TipRanks)

Covering Elastic for Oppenheimer, analyst Ittai Kidron reiterated a Buy rating on the stock on Jan. 6. Elastic is among Oppenheimer’s top picks and Kidron is optimistic about “its growing platform breadth and its Elastic Cloud-first approach, priming the pumps for continued strong customer growth, net expansion improvement, and deeper account penetration as Observability and Security use cases gain momentum.”

Kidron highlighted catalysts like the increased focus on Elastic Cloud (given the 81% SaaS revenue growth in 2Q to $37.4 million), “ability to drive new use case adoption and higher tier use,”  the enormous untapped opportunity in security solutions and the stronger-than-anticipated net expansion potential as sales productivity returns to pre-COVID levels.

The stock’s valuation is compelling, in Kidron's opinion, given that it currently trades at about 18.0x his calendar year revenue estimate and at a discount to similar high-growth peers, which are trading at a valuation of about 25.0x. Kidron upped his price target for the stock to $170 (upside potential of 19.7%) from $140.

The rest of the Street echoes Kidron’s optimism on Elastic, as reflected by the Strong Buy analyst consensus backed by 9 unanimous Buys. With shares rising a whopping 109.4% over the past year, the average price target of $155.22 indicates an upside potential of 9.3% in the 12-months ahead.

Conclusion

Rapid digitization and the shift to the cloud are expected to continue to drive further growth for Splunk and Elastic. The Street is highly optimistic about Elastic’s strong execution and growth prospects over the long-term. That said, investors looking for higher upside potential in the near future could find Splunk more attractive.

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment