KeyBanc upgrades Splunk, cuts DataDog as firm gets 'increasingly selective' on cloud
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Investment bank KeyBanc Capital Markets upgraded Splunk (NASDAQ:SPLK) and downgraded Datadog (NASDAQ:DDOG) on Monday as the research firm said it is getting "increasingly selective" on cloud software stocks, citing the potential for a "meaningful" slowdown this year.
Citing a fourth-quarter survey that showed lowered IT growth expectations for 2023, analyst Michael Turits raised his rating on Splunk (SPLK) to overweight from sector weight and cut Datadog (DDOG) to sector weight from overweight.
"During the last 2 quarters, slowing has spread even to cloud, potentially impacting a range of 'cloud enablers' in observability, data, and devops; and to security as well, if less than IT overall and with consolidators benefiting," Turits wrote in a note to clients.
Regarding Splunk (SPLK), Turits said the company has performed better under new CEO Gary Steele and made a "smooth transition" to being a multi-tenant cloud, as evidenced by better gross margins and improvement on more customer-friendly workload pricing.
Turits added Splunk's (SPLK) "pervasive enterprise presence" and entrenched position in security and data and analytics in a tough spending environment is a positive. It has also performed strongly in both on-premise and off-premise spending.
Under Steele, who took over in April 2022, Splunk (SPLK) has continued to increase its efficiency and become cash flow profitable, along with a continued refocus on its core security business.
"Plus, while chatter has existed for many years regarding Splunk as a takeout target, we continue to see private market value support for the stock at 4.4x revenues vs. 5.1x recent infrastructure takeout multiples," Turits added. 
Splunk (SPLK) shares rose more than 1% in premarket trading on Monday.
Turits downgraded Datadog (DDOG) citing the continued worsening macroeconomic conditions seen in December, the expected continuation, at least for the first half of 2023, as well as decelerating growth in the cloud, as evidenced by Microsoft's (MSFT) weak guidance for Azure.
The analyst also noted that there may be issues for Datadog (DDOG) generating higher margins, due to increases in sales and R&D investments to keep its high revenue growth.
As such, he lowered his 2023 and 2024 estimated revenue growth rates to 32% and 30% year-over-year, down from 35% and 30% year-over-year.
Datadog (DDOG) declined 3.1% to $77 in premarket trading on Monday.
Earlier this month, Splunk (SPLK) said it would reduce roughly 4% of its global workforce, mostly in North America, as part of a reorganization to optimize its processes and cost structure.
Analysts are largely bullish on Splunk (SPLK). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Conversely, Seeking Alpha's quant system, which consistently beats the market, rates SPLK a HOLD.