On November 15th, Splunk, the market leader in APM and security, announced that its CEO Doug Merritt will be replaced by the Chair of the Board, Graham Smith. "We determined now is the right time to transition to our next phase of leadership - in particular, the Board is focused on identifying a leader with a proven track record of scaling operations and growing multi-billion dollar enterprises." 

We believe the conversation has been going on for a while for persistent weak performance, but the sudden announcement shocked the market nonetheless. The transition of CEO in the middle of cloud transformation will add a lot of uncertainty, plus Graham Smith is a "finance guy," and investors would feel more comfortable if the COO were named to CEO to lead the company through cloud transformation. The company also pre-announced the Q3 results, with Cloud ARR reaching $1.1B, growing 75% YoY.

It seems there is an apparent disconnection between Splunk's market-leading position and its valuation. Splunk owns the largest market share in the broad ITOM space. Their $2.8B ARR is more than DDOG and small players combined but trading at a significant discount. At $1B cloud ARR, the failing of the cloud transition is not very likely. Their early success in security and logging, cash flow generation capabilities, plus cheap valuation set up the stage for a potential turnaround-rerating story.

It's still worth highlighting the tightened competitive environment in APM, monitoring, and security space. At the current price, SPLK might also be taken out privately. We will keep a close eye on its cloud transition progress, organic cloud revenue growth, and changes in market share.