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Morningstar | Splunk Competitive Positioning Looking Increasingly Positive

Splunk’s path from upstart to a legitimate threat to legacy data analysis software vendors has accelerated as large companies have recognized the firm’s versatile offerings. Enterprises are increasingly turning to Splunk to handle a multitude of use cases, from application monitoring to security, yielding increasing customer switching costs and a long runway for growth.Machine log analysis is not a new concept, but enterprises are increasingly required to understand the voluminous data produced by every server, application, sensor, and PC on their network. Traditionally, log analysis has been used as a tool to troubleshoot the IT stack. Splunk’s products enable companies to move beyond that one-dimensional use case by providing real-time insights into how users are behaving within the IT infrastructure and how customers are interacting with the company.Splunk’s schema-on-the-fly technology allows users to compile massive data sets spanning a multitude of formats and quickly normalize, analyze, and draw meaningful conclusions. The security applications remain the largest part of the business, but with data being produced by an increasing number of disparate sources, deciphering this broad data mosaic is becoming increasingly important for operational efficiency and competitive differentiation. Developers can build custom applications on top of Splunk’s platform, enabling firms to glean insights about store networks, promotion effectiveness, and other key initiatives.Splunk has a number of key tailwinds behind it, including the burgeoning Internet of Things that will help drive data growth of roughly 40% annually through 2020. However, heavily entrenched competitors and the firm’s business model transition mean it still faces challenges. Further, the company is deeply unprofitable, which we attribute to its rather steep salesforce compensation, though it has begun to show signs of improving its sales and marketing leverage. We think the company’s product set has evolved to a point where it is becoming increasingly embedded with customers, and we believe increasing deal sizes will lead to significant operating leverage in the longer term.