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Wolfe Research analysts initiated research coverage on two software stocks – Datadog (NASDAQ:DDOG) and Splunk (NASDAQ:SPLK).
The analysts are more bullish on the latter as they started the coverage at Outperform with a $90 per share price target. Valuation is “by no means aggressive,” hence the risk is tilted to the upside, the analysts wrote to clients in a note.
“While our realistic model is slightly below on Cloud revenue, we still get 42% upside if we put a Heavyweight Growth multiple of ~7.3x on that business alone. Finally, we also believe that Splunk will start generating cash and be a Middleweight Efficiency rule of 36 company where comps trade at 5.9x EV/Sales and 35x EV/ FCF which would be 70% upside,” the analysts told clients in a note.
They analysts are less bullish on Datadog due to a number of reasons. The enterprise software company earned a Peer Perform rating and a $55-70 “fair value” share valuation, which is below DDOG’s closing price on Friday.
“We love the product and see the opportunity in a large market that is thematically tied to the secular public cloud adoption still in early innings (total revenue only represents ~1% of spend on AWS, Azure, and GCP), but the combo of valuation, risk-off sentiment, and decelerating near term growth trends keep make the catalyst path difficult.”
