Splunk Inc. is the perhaps the purest play on this trend, a startup founded in 2007 and went public earlier this year. They make software which can read and analyze large amounts of raw machine-data. But there are three 3 specific reasons to sell/short:
1) Persistent insider selling + lockup expiration on Oct 15. Less than 3 months after going public (i.e. this July), SPLK announced a special secondary offering of shares by execs. This is a secondary offering, meaning, the company itself gets no money, only insiders selling. If the company's prospects were as good as they were touted during ipo 3 months ago, why are execs in such a hurry that they had to ask underwriters to waive the usual lockup?
A lock up is specifically designed to align the sellers of the company with new shareholders - yet without explanation, SPLK sells more in July? Even though another wave of selling is allowed in Oct 15, just 3 months later? At the very least, it is a grey area, perhaps smacking of desperation selling.
There is another similarly-hyped technology company whose founder sold in a secondary offering months after the ipo at 12$, ZNGA (which is now at $2.49):
Could history repeat itself?
2) Heightened competition from established players (ORCL, HP). Zack Buckley presented a full short thesis at the Value Investors Congress. Key point is that the company charges $120k for a product that others are charging 34k, and that even at $120K SPLK is losing money.
3) Weak revenue streams/growth by design. From the Q2 10-Q:
"A substantial majority of our license revenues consists of revenues from perpetual licenses, under which we generally recognize the license fee portion of the arrangement upfront" (p17, my emphasis).
also:
" Typically, when purchasing a perpetual license, a customer also purchases one year of maintenance service for which we charge a percentage of the license fee" (p17, my emphasis)
In other words, there is no recurring revenue stream - once someone buys the product, they the revenue that any customer will get is in the first 2 years and has mostly been recognized. This is not CRM with its SaaS platform that is actually "sticky" and has 90% recurring revenue.
The growth that people are looking for, even on the revenue side, is vastly overstated. Essentially out of the thousands of customers that SPLK claims, they won't make much more money from them.
Finally, this is why at a valuation of 20+x ttm sales and no profit, SPLK can go to 10$ (or even lower).
Careful investing to all,
-Stanley
*Disclosure: am short SPLK, ZNGA
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