For Immediate Release
Chicago, IL – February 5, 2020 – Zacks Equity Research highlights Splunk (SPLK - Free Report) as the Bull of the Day and Baozun (BZUN - Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Bank of America (BAC - Free Report) , Intel (INTC - Free Report) and IBM (IBM - Free Report) .
Here is a synopsis of all five stocks:
Bull of the Day:
Splunkcrossed the $25 billion market cap mark on Tuesday and it's no wonder when you understand how important the big-data platform has become to Fortune 1000 corporations seeking to find and analyze their "dark data."
That's what CEO Doug Merritt calls the challenge for companies who are flooded in new sources of new data from the web, from sensors and networks, and from their own internal systems tracking and storing every byte from customer engagement to energy usage.
Splunk also helps these enterprises with the security aspects of their data deluge.
Splunk’s Q3 Earnings Gain on Cloud and Software Revenues
In late November, Splunk reported third-quarter fiscal 2020 (ends January) earnings of 58 cents per share, which beat the Zacks Consensus Estimate by 11.5% and surged 52.6% year over year. The stock has surged 32% since this stellar report.
Revenues climbed 30.2% year over year to $626.3 million and comfortably beat the Zacks Consensus Estimate by 4%. The year-over-year upside was driven by greater utilization of Splunk’s products by existing customers and new customer wins.
Quarter in Detail
License revenues (59.7% of revenues) were $373.7 million, up 33.6% year over year. Maintenance & service revenues (40.3% of revenues) rose 25.5% to $252.7 million.
Software revenues jumped 40% from the year-ago quarter to $454 million. Splunk stated that 92% of software bookings were either term or cloud.
Third-quarter remaining performance obligation (RPO) was $1.45 billion, up 52% year over year. The company expects to recognize $862 million (up 42% year over year) of this RPO as revenues over the next 12 months. RPO bookings grew 42% year over year to $839 million.
Cloud revenues soared 78% from the year-ago quarter to $80 million on the back of increased utilization of cloud-based services. Management expects cloud’s contribution to grow 50% over the next few years. In the reported quarter, Cloud ARR was $368 million.
Splunk announced it received FedRAMP authorization from the General Services Administration (GSA) FedRAMP Program Management Office (PMO) at a moderate impact level. Agencies that are eager to remove the barrier between data and action will be able to use Splunk Cloud to turn data into doing.
The company continues its successful transition to a subscription or renewable model, which is evident from the fact that Splunk met its 75% transition rate for fiscal 2020 in fiscal 2019 itself. However, this transition is a headwind for the perpetual business, which is declining rapidly.
Splunk added 450 new enterprise customers in the reported quarter. The company had 134 orders greater than $1 million in total contract value, up 21% from 111 last year.
Splunk unveiled its Data-to-Everything Platform in the third quarter including new products such as Data Fabric Search (DFS), Data Stream Processor (DSP) and Splunk Mission Control.
Additionally, the company also announced new versions of Splunk Enterprise 8.0 and Splunk Enterprise Security 5.0, designed to process massive scale to data in any form.
After the November 21 report, analysts across the Street raised their price targets, with Morgan Stanley, Wells Fargo, SunTrust, Jefferies and Goldman Sachs creating a new higher consensus above $170. This caused shares to jump above $150 within a week.
Actually, while the Goldman analyst was late to the party with an upgrade to Buy (from Neutral) on December 2, the analyst from Morgan Stanley even preempted the earnings with this upgrade on Nov 18 when shares were still below $120...
Morgan Stanley analyst Keith Weiss upgraded Splunk to Overweight from Equal Weight with a price target of $169, up from $140. He wrote in his research note that the "Increasing clarity from a shift to a recurring rev model likely reveals a durable 25%+ ARR growth story, with FY23 FCF approaching $1B - which looks undervalued at current levels."
Weiss further described why once Splunk is through its shift to a 100% recurring revenue model and annual invoicing, investors will have better visibility into a company well positioned for key secular trends in data and monitoring. The analyst believes Splunk can sustain 25%-plus software annual recurring revenue growth, with free cash flow margins in the mid-20s, yielding $6 in free cash flow per share. His under-valued thesis was that Splunk shares currently trade at a 30% valuation discount relative to peers on an enterprise value to 2020 sales basis.
Then in mid-January, lots of analysts came back with fresh "new year" perspectives on Software and raised their outlooks again, including Weiss at Morgan Stanley with a PT boost to $185...
Wells Fargo: Splunk price target raised to $200 from $175 with analyst Phil Winslow saying he anticipates continued healthy growth in software spending in 2020 and expects software stocks as a whole to relatively outperform the market. Winslow also believes the next decade will bring "massive advances" toward a more fully connected and immersive world -- one in which artificial intelligence and machine learning, natural language processing, augmented reality, 5G, edge/fog, and the Internet of Things mature and become both commonplace and transformative. He expects software to be a key enabler of this increasingly connected decade.
SunTrust: Analyst Joel Fishbein boosted his SPLK price target to $190 from $175 as part of his broader 2020 Infrastructure Software Outlook research note. The analyst noted that concerns around the company's strategy transition to a recurring revenue model were alleviated by the strong ARR and RPO metrics as well as operating cash flow forecast of $1 billion for FY23.
Jefferies: Analyst Brent Thill maintained a Buy rating on Splunk, and raised his price target on shares to $180 from $165. He called the company one of his top picks in Small/Mid Cap Software, saying it "remains well positioned as a leader at scale in the log management space with ongoing success in workload penetration for ITOM, application delivery and SIEM (security information and event management) use cases."
Bear of the Day:
Baozun is a $2 billion provider of digital and e-commerce services in China. The Shanghai-based company's services include website design, development and hosting, information technology infrastructure, customer service, warehousing and logistics services as well as digital marketing.
The reason that BZUN has fallen into the cellar of the Zacks Rank is that analyst earnings estimates have dropped significantly.
I last wrote about Baozun as the Bear of the Day in early December when shares were still trading above $35. Here's what I noted about this steady earnings decliner...
Fast-forward to today and BZUN has once again been spending lots of time as a Zacks #5 Rank, even before the company reported earnings on November 21. On that event, shares gapped down from $44 to $36 and subsequently the 2019 EPS estimate has collapsed further from $1.30 to $1.00.
The results are confirming what we've seen across the board in Chinese technology stocks as the largest consumer class in the world struggles with a slowing economy and trade disputes.
(end of December 6 report excerpt)
No doubt the coronavirus epidemic is impacting forward views of the outlook as well.
Since that report, 2019's EPS tally has fallen 10% to $0.90 and we should hear confirmation of this in their Q4 report by early March. Meanwhile, full-year 2020 estimates dropped from $1.60 to $1.40.
Until visibility on growth in Chinese stocks becomes clearer, it's best to stand aside. The Zacks Rank will let you know.
3 Extra Large Caps with Great Zacks Ranks
This earnings season is turning out much better than investors were fearing. Sure, earnings are down from last year, but that was to be expected after such a strong market performance in 2019. But most companies are beating expectations. According to Sheraz Mian’s recent Earnings Trends, approximately 70% of companies have outperformed on the top and bottom lines.
You can thank the large caps for a lot of that success! Whether it’s the big banks that kicked everything off a couple weeks ago or the tech names that are really flexing their muscles right now, this asset class is showing everyone how it’s done.
We’ve got a screen called XL Large-Caps with the Best Zacks Rank that finds companies with market caps over $25 billion that also are ranked Strong Buys or Buys. Below are three companies that passed the criteria for this screen and just reported solid quarterly results.
Bank of America
Earnings season has been pretty good so far, and it all got started with the big banks last month. Bank of America was one of those behemoths that got us started on the right foot.
On January 15, the company reported its sixth straight positive earnings surprise. Earnings per share of 74 cents for the fourth quarter beat the Zacks Consensus Estimate by 8.8% and also improved 6% from last year.
More specifically, BAC has beaten 14 times and matched once in the past 15 quarters, which means it hasn’t missed since early 2016. It has also amassed an average surprise of 8.6% over the past four quarters.
Revenue of $22.3 billion was down a bit from last year, but did inch past our consensus of around $22 billion.
The Banks – Major Regional space is in the Top 14%, which is a nice position given the unusually low interest rate environment.
BAC has certainty felt the pressure with several business segments showing lower net income generation from last year. However, the company enjoyed improved trading and investment banking numbers, as well as decent loan growth.
Furthermore, BAC is also opening branches in new regions, improving its digital offerings, focusing more on consumer banking and controlling costs.
Earnings estimates have been trending higher for months. The Zacks Consensus Estimate for this year is $3.05, which is up 2% in three months and 1.3% in the past 30 days.
Earnings are then expected to grow approximately 8% to $3.29 next year. That consensus has advance 3.8% in 90 days and 2.2% in 30.
Shares of BAC are up 15% over the past year, which is pretty good for a stable name with a market cap just under $300 billion.
There are two things that Intel knows how to do REALLY well: 1) make chips and 2) beat the Zacks Consensus Estimate.
This company hasn’t missed in years. Take a look at the Price, Consensus & EPS Surprise graph below; green arrows right off the page!
The latest beat included fourth-quarter earnings per share of $1.52, which topped our consensus by more than 22% and brought the four-quarter average up to 14.6%.
Earnings per share improved by more than 18% from last year as well.
But that’s only part of what the CEO called: “the best quarter in company history.”
INTC also reported revenues of $20.2 billion, which marks the first time it made more than $20 billion in a single quarter. The result beat the Zacks Consensus Estimate by 5.2% and improved nearly 9% from last year.
One of the brightest spots in the quarter was the Data Center Group, which saw revenues jump 18.8% from last year to $7.21 billion. The upside was led by a strong mix of high-performance second-gen Xeon Scalable processors and solid demand for Cloud service providers (CSP).
Furthermore, its PC group rose 2% when the market was expecting a decline.
Earnings estimates have improved nicely since the report. The Zacks Consensus Estimate for this year is now $4.99 per share, or 5.7% better than 30 days ago.
The estimate for next year is up to $5.09 after rising 7.8% in that time. For the moment, analysts only expect a 2% improvement from the previous, but there’s plenty of time for that to change especially if the CEO is right that 2020 will be another record year.
Shares of INTC have gained approximately 46% over the past year, and its part of the highly ranked Semiconductor – General space (Top 16% of the Zacks Industry Rank).
Revenue growth of 0.1% doesn’t seem like something to write home about, unless of course you’ve reported five straight quarters of year-over-year declines.
Such was the case for IBM in its fourth quarter report, which came out on January 21. Shares are up by more than 5% since then and nearly 14% in the past year.
Big Blue was one of the first big caps to report strong numbers and, therefore, help calm investor fears that this earnings season would be a disappointment.
So far, it hasn’t been, especially for the large caps and technology… and IBM is both!
Revenues of nearly $21.8 billion inched higher year over year, but more easily beat the Zacks Consensus Estimate by 0.4%.
We can look to the clouds for the main reason why this long revenue growth slump came to an end. Total cloud revenues soared 21% to $6.8 billion.
Another noteworthy performer was Red Hat, which had revenues rally 24%. IBM completed this acquisition in July as part of its efforts to boost the Open Hybrid Architecture Initiative. Red Hat is part of the Cloud and Cognitive Software segment.
Acquisitions are a big part of IBM’s growth and that will continue moving forward. It has bought more than 150 companies since 2000.
On the bottom line, IBM doesn’t usually beat by a lot… but it does beat often. For the fourth quarter, earnings per share of $4.71 topped the Zacks Consensus Estimate by 0.43%. The average beat over the past four quarters is 1.8%, which isn’t bad for a company this size that’s been around for over 100 years.
IBM has a record of positive earnings surprises that stretches back several years.
Looking forward, its growth will be driving by cloud computing (of course), but also analytics and security. IBM expects 2020 non-GAAP earnings per share of $13.35, which caused expectations to move up recently.
The Zacks Consensus Estimate for this year is now $13.33 per share, which has advanced 1% from two months ago. Next year’s outlook has risen by the same amount to $14.16, which suggests year-over-year growth of more than 6%.
7 Best Stocks for the Next 30 Days
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