June 22, 2021, 3:53 p.m. EDT

Splunk stock rockets with Silver Lake investment, buyback program seen as ‘ballast’ for beaten-down shares

By Emily Bary

Splunk shares are rallying more than 10% in Tuesday trading after the company notched a $1 billion investment from Silver Lake that one analyst said was “a nice validation point” of the company’s strategy.

Silver Lake plans to invest $1 billion in convertible senior notes while putting its chairman on the software company’s board of directors, Splunk announced Tuesday morning. Splunk (NAS:SPLK) also has gained authorization for a share-buyback program of up to $1 billion, which is expected to help mitigate the dilutive impact of Silver Lake’s convertible notes.

The agreement helped breathe some life into Splunk’s stock, which had declined 35% in a 12-month span as of Monday’s close while the S&P 500 (S&P:SPX) and the iShares Expanded Tech-Software Sector ETF (BATS:IGV) had each gained about that much in the same time period.

“We see the $1 billion investment as a nice validation point that Splunk is near an inflection point post their subscription transition as we are also bullish on their new Security Cloud offering that launched today in the U.S.,” wrote RBC Capital Markets analyst Matthew Hedberg.

“Over the past few weeks, we continued to hear from investors that an investment and/or buyback would be a positive signal to the market that the most challenging times of the transition are likely behind them as they look to accelerate adoption of their cloud tech stack,” he continued. Hedberg has an outperform rating and $200 price target on the stock.

Evercore ISI analyst Kirk Materne wrote that the Silver Lake agreement “helps reframe” the discussion around Splunk’s risk-reward balance.

“Bottom line: we believe the Silver Lake investment helps support our view that Splunk’s business model transition is progressing, the competitive concerns are fully reflected in the valuation, and the recent underperformance was a bit overdone,” Materne wrote, while maintaining an outperform rating and $186 price target on Splunk shares.

Mizuho analyst Gregg Moskowitz upped his price target on Splunk’s stock to $150 from $135 following the announcement, and while he saw positives in the new arrangement, he kept a neutral rating on the stock.

“In and of itself, this transaction doesn’t solve Splunk’s challenges that include a noisy business model transition, somewhat inconsistent execution, and an increasingly competitive landscape,” he wrote. “Having said that, this is a favorable transaction for Splunk, and we commend Splunk’s management team for structuring this deal.”

The convertible notes are set to mature in July 2026 and bear 0.75% interest annually. They have an initial conversion price of $160, which is 30% higher than the volume-weighted average closing price of Splunk’s stock in the 10 days leading up to June 21, per Splunk’s release.

“We expect that all, or virtually all, of the $1 billion proceeds will be used towards share buyback over the near- to medium-term. This should help to provide ballast to a stock that has materially underperformed,” Moskowitz wrote. “In addition, we believe this arrangement could lead to other strategic outcomes, including smart acquisitions that could enhance Splunk’s value proposition.”

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