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Monday, January 30, 2023

Splunk suddenly looks like a Slam Dunk

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The story continues Splunk Inc. (NASDAQ: SPLK) is not unknown.


MarketBeat.com – MarketBeat

During the first months of the pandemic, the software stock rose to record highs on the accelerated digital transformation (not to mention the euphoria of stay-at-home merchants).

If normalization and Fed rate hikes then it started, the stock fell hard. The surprise departure of former CEO Doug Merritt added to the uncertainty. In Splunk’s case, a two-year free fall from $225 to $65 brought the stock to its lowest level since 2017.

A happy ending may be yet to come.

Last week’s third-quarter earnings report showed that the company’s data analytics offerings remain highly relevant in a faltering economy. Splunk’s high-volume gapper on December 1 may well be the spark that sparked a turnaround.

What does Splunk do?

Splunk’s data analytics software helps customers make more informed business decisions. It provides a real-time view of IT infrastructure, operations, security, compliance, and a wide range of business and website analytics. Enterprises looking to gain a competitive advantage use Splunk software to embrace large data sets and capitalize on opportunities or solve problems.

Splunk’s flagship Enterprise offering is a machine data platform that can collect and index massive amounts of data on a daily basis. Users can interact with Enterprise to analyze and visualize information stored in popular data sources such as Amazon S3 and Hadoop. It’s a market that’s not short of competitors, including heavyweights like IBM, Intel, and Microsoft.

Despite the competition, Splunk has managed to accumulate a growing number of customers. More than 90 of the Fortune 100 companies have deployed Splunk software. The company’s international success stories abroad include Carrefour, Puma and Heineken.

Why did Splunk Stock go up?

After the market closed on Nov. 30, Splunk reported third-quarter sales and earnings that beat Wall Street expectations. Revenue growth was 40% and adjusted profit of $0.83 was more than three times the consensus estimate. The results not only showed that companies are still investing in the Splunk platform, but also that cost-cutting measures are being taken.

This prompted management to raise its full-year sales and profitability outlook, giving investors more incentive to bid for the stock. After an adjusted operating margin of 21.3% in the third quarter, the company expects to achieve a margin of 23% to 26% in the current quarter and a much higher full-year margin than previously anticipated. Forecasts for full-year revenue and free cash flow were also raised. Healthy sales growth and improving margins have been a rare combination in the technical sector lately.

Splunk extended the revenue rally by announcing an extended partnership with Amazon Web Services (AWS) the following day. The partnership enables joint customers to migrate cloud computing environments and securely scale modernized workloads. Splunk and AWS, who have been working together for 10 years, have committed to another five years.

Join forces with Amazon is never a bad idea. Combined with the beat-and-raise quarter, Splunk was up 18% on Dec. 1 and managed to hold onto most of the gains in the following day’s bear market.

What makes Splunk Stock a good investment?

Where Splunk goes from here will largely depend on the economic climate, as well as the advancement of emerging technologies such as Internet-of-Things (IoT) and artificial intelligence (AI). As the industrial revolution unfolds, Splunk’s ability to help companies identify and correct manufacturing and other operational problems should also be a long-term vision. growth driver. These two opportunities are reasons to own the shares for the next five to ten years.

As these catalysts develop, Splunk’s presence in the fast-growing data analytics software is expected to drive growth in the medium term. The company’s core IT management platform is complemented by network security and application performance management solutions that create new revenue streams.

A diversifying subscription model that generates recurring revenue is the main attraction for software stocks, and Splunk certainly fits the mold. While total annual recurring revenue (ARR) growth has slowed, cloud-based ARR is growing at a higher clip — boding well for the longer-term trend as Splunk’s shift to cloud software continues.

Another shift Splunk is making is perpetual licenses to ratifiable licenses, a transition other software players have successfully made. Ratable licenses include smaller upfront payments and are paid in smaller installments, but typically have greater value over the life of the contract. This limits short-term profitability but, like the shift to cloud offerings, should lead to stronger long-term revenues.

Splunk’s $20 increase since October makes it a less attractive takeover candidate, as many have speculated. But the better reason to love the stock is its demand for real-time business decision solutions tied to industrial automation and other disruptive technologies. The other side of the business model transformation should come with spicier growth and profits.

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