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The Internet of Things (IoT) has become an ecosystem where analytical tools, cloud-based solutions and software are integrated to enable businesses to function efficiently. With more enterprises investing in IoT devices to deliver solutions that will power the digitally connected future, leading software companies Splunk (SPLK) and PTC (PTC) are poised to grow in the coming months. But let’s find out which of these stocks is a better buy now.
Splunk Inc. (SPLK) and PTC Inc. (PTC) are two leading computer software and services companies operating in the United States. SPLK offers Splunk Platform, Splunk IT Solutions, Ecosystem Solutions, and other interfaces that enable its ecosystem. PTC provides ThingWorx, an IIoT (Industrial Internet of Things) platform, that allows customers to address the digital transformation of their operations, products, and services.
At the epicenter of the digital revolution stands the Internet of Things (IoT), which is now influencing everything from people’s personal lives to how enterprises operate across all industries. With the rapid adoption of trending technologies, such as Big Data, cloud solutions and AI, organizations are eager to integrate IoT into their processes. Because the demand for data collection and analysis through IoT devices is skyrocketing, SPLK and PTC are well positioned to generate strong momentum.
PTC has gained 129% over the past year, while SPLK has returned 1.2% over the same period. Also, in terms of their past month’s performance, PTC is the clear winner with 13.5% gains versus SPLK’s negative returns. But which of these stocks is a better pick now? Let’s find out.
This month, the Department of Defense designated an $833 million Core Enterprise Technology Agreement (CETA) for SPLK’s products and services. Under the agreement, SPLK will provide the DoD with asset management and cybersecurity software solutions, maintenance support and training.
On April 22, PTC expanded its Software as a Service capabilities with the addition of Vuforia Expert Capture and Creo Generative Design Extension on its PTC Atlas SaaS platform. This robust addition will allow the company to provide market-leading offerings to its customers and partner network.
And in March, PTC introduced its newest addition, the Vuforia Engine Area Targets, to its Vuforia AR enterprise platform. This will enable industrial organizations to create AR interfaces within their facilities to allow employees to better engage with machinery.
Recent Financial Results
During the fourth quarter, ended January 31, 2020, SPLK’s total revenue decreased 6% year-over-year to $745 million. The company’s gross profit declined 10.3% from its year-ago value to $595.18 million, while its maintenance and services revenue declined 21.6% from the prior-year quarter to $167.73 million. Its loss from operations came in at $86.6 million, while net loss was $139.55 million for this period. Also, the company reported an $0.86 loss per share.
In the fiscal first quarter ended December 31, PTC reported $429 million in revenues, representing a 20.5% increase year-over-year, driven primarily by strong large-deal results and longer contract durations. The company’s non-GAAP operating margin was 36%, compared to 26% in the third quarter 2020. PTC’s operating income was $90.34 million, up 196.9% year-over-year.
Past and Expected Financial Performance
SPLK’s revenue has increased at a CAGR of 19.4% over the past three years. In comparison, PTC’s revenue grew at an annualized rate of 8.9% over this period. Also, SPLK’s levered free cash flow has increased at a CAGR of 5.3%, over the past three years, while the CAGR of its levered free cash flow rose 23.3% over this period.
SPLK’s revenue is expected to rise 13.9% in the current year, and 22.9% next year. The consensus EPS estimates indicate a 32.7% decline in the current year. On the other hand, analysts expect PTC’s revenue to increase 17.2% in fiscal 2021 and 10.5% in 2022. Also, the company’s EPS is estimated to increase 23% in the current year and 20.9% over the next five years.
SPLK’s trailing-12-month revenue is 1.45 times higher than PTC’s. However, PTC is more profitable with a gross profit margin of 78.2% versus SPLK’s 75.5%.
Furthermore, PTC’s 24.8% levered free cash flow margin compares favorably with SPLK’s 6.6%.
In terms of trailing-12-month Price/Sales, PTC is currently trading at 11.16x, 17% higher than SPLK, which is currently trading at 9.54x. However, SPLK’s trailing-12-month Price/Book ratio of 13.63x is 18.5% higher than PTC’s 11.50x.
PTC has an overall B rating, which equates to a Buy in our proprietary POWR Ratings system. However, SPLK has an overall D rating, which translates to Sell. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
In terms of Growth Grade, PTC has a B, in sync with its superior financials. In comparison, SPLK has a D Grade for Growth.
PTC has a B grade for Sentiment also, which is consistent with analysts’ expectations that its revenue and EPS will increase. SPLK’s C grade for Sentiment reflects its relatively weak EPS and revenue growth expectations.
PTC has a B grade for Quality, which is consistent with its significantly higher-than-industry profitability ratios. However, SPLK has a C grade for Quality because its trailing-12-month gross profit margin is higher than the industry average, but its ROE and ROA are negative.
Among the 119 stocks in the D-rated Software – Application industry, PTC is ranked #13 while SPLK is ranked #84.
In addition to the grades we’ve highlighted, our POWR Ratings system has also rated both SPLK and PTC for Momentum, Stability, and Value. Get all PTC ratings here. Also, click here to see the additional POWR Ratings for SPLK.
Because the market’s demand for IoT, data driven solutions and cloud transformation has never been higher than now, both SPLK and PTC are expected to see a greater demand across their diverse product portfolios. However, PTC’s double-digit top line growth, strong cash flow generation and strategic investments in product innovation should help it perform better in the near term. PTC also seems to be more profitable compared to SPLK. So, it is a better bet now.
Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to learn about the top-rated stocks in the Software – Application industry.
SPLK shares were trading at $132.60 per share on Monday morning, down $0.60 (-0.45%). Year-to-date, SPLK has declined -21.95%, versus a 12.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Imon Ghosh
Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.
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