In the fast-paced world of technology, major acquisitions or IPOs can send shockwaves through the industry. After the recent IPO of Arm Holdings, there has been another huge announcement this week. Cisco has just announced their intent to acquire Splunk Technologies for over US$28 billion.
For Cisco, this transaction might be pivotal in their expansion of their service offerings outside of their telecommunications equipment services. However, many people might not be familiar with Splunk Technologies’s operations and recent financial status. In this article, we will deep dive into this Cisco and Splunk acquisition deal and whether it makes sense for Cisco to pursue it?
Splunk Technologies Background
Splunk Technologies is a leading player in the realm of data analytics established in 2023. At its core, Splunk is a data analytics platform designed to ingest, manage, search and analyse vast amounts of data. This data could come from a variety of sources within an organisation. This includes IT infrastructure, application, security systems and IoT devices.
In addition, Splunk applications are diverse and span across various industries and use cases. This is especially popular and important in the realm of cybersecurity and marketing. Companies leverage Splunk to detect security threats by analyzing data logs and events from firewalls, antivirus and other security threats. In marketing and business intelligence, Splunk enables companies to analyze customer data to identify patterns and opportunities.
Cisco and Splunk Financial Earnings over the past 5 years
After understanding Splunk Technologies business, it is also key to understand the current financial situation of Splunk.
Looking at the revenue growth between both, Splunk demonstrated stronger growth at ~20%. However, Splunk is currently slightly unprofitable at -0.6% net income margin. This is vastly different from Cisco who is profitable with a net income of 22.1%. Hence, it is highly likely that Splunk revenue growth and declining unprofitability was the key driver behind the Cisco and Splunk acquisition deal.
Splunk Technologies current valuation
Looking at current valuation and the $28 billion that Cisco is acquiring, it would seem like a slight premium. This is because at its current price US$146/share, this is only at US$24.6 billion market valuation. As a result, Cisco and Splunk acquisition is approximately ~20% above its current market valuation.
Conclusion to the Cisco and Splunk Technologies Acquisition
Additionally, Cisco’s telecommunication services continue to generate the majority of its FY23 income. It accounts for more than 75% ($43B) of its total income. While service or subscription based revenue only account for 25% of Cisco’s revenue. However, ever since Splunk Technologies started shifting towards subscription-based revenue, it has grown to about 40% of its entire revenue.
Therefore, the Cisco-Splunk acquisition might be viewed as a strategic shift by Cisco to become more subscription-based. In addition, the unprofitability of Splunk has decreased drastically over the past few years. As such at its current valuation, Splunk technologies does seem like a reasonable investment for Cisco at this point of time.
Share Disclosure: Currently do own some Splunk Technologies Holdings
In addition, do check out our other latest articles. If you are keen, check out our articles on other analysis: Trust Bank Referral and Best Fixed Deposit in Singapore in Sep 2023.
Free USD18 with just a simple deposit of $1.
Disclaimer: The information provided by LearnToInvest serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before the usage of these products. We do not offer any warranty or assurance regarding the quality of these services or goods.