Splunk has stabilized its management team under new CEO Gary Steele, according to KeyBanc analyst Michael Turits.
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As companies tighten their budgets ahead of a potential recession, enterprise software spending is likely to slow in 2023. That has consequences for many stocks in the group.
KeyBanc Capital Markets analyst Michael Turits said in a research note Monday that a recent survey of technology resellers found expectations for just 0.8% growth in spending on information technology this year, compared with a 3.6% increase in 2022. Growth is slowing at the large cloud players, including Amazon Web Services, Microsoft Azure and Google Cloud, and nine of the companies he covers have announced job cuts since last June, Turits wrote.
“Commentary by IT buyers, vendors, and channel partners suggests very low IT purchasing in the first half,” with hopes that buying will reaccelerate in the second half and into 2024, he said. When a rebound might come isn’t clear, while over the past two quarters, the slowdown has spread not only to the cloud also to adjacent areas like security and observability, he said.
Observability software helps customers keep tabs on their cloud-based networks.
Turits advises a two-pronged strategy to the sector. For one, he suggests buying a basket of more defensive, lower-valuation plays with moderate growth but solid cash flow, including
Oracle
(OCRL), Workday (WDAY), and
Palo Alto Networks
(PANW), all Overweight-rated. Adding to that group on Monday, he raised his rating on
Splunk
(SPLK) shares to Overweight from Sector Weight.
Turits said Splunk has stabilized and streamlined its management team under new CEO Gary Steele, and argued the company has an “incumbency advantage” as an established player in a tougher spending environment. He also sees the company as a potential acquisition target.
He set a target of $130 for the stock price. Monday morning, the shares were marginally higher at $104.74.
Meanwhile, Turits said, he is becoming increasingly selective about higher valuation “cloud-enabler” plays after another quarter of slower growth at the large cloud players. He reduced his rating on
Datadog,
a provider of observability software, to Sector Weight from Overweight.
Datadog, Turits said, has the highest price-to-sales multiple of any stock he follows. The analyst reduced his forecasts of revenue growth for the company for both 2023 and 2024 to reflect a difficult economic environment and increasing competition.
Datadog was off 1.5%, to $78.24.
Write to Eric J. Savitz at eric.savitz@barrons.com
Credit: marketwatch.com