Shares of software-as-a-service (SaaS) company Splunk (NASDAQ: SPLK) have more than tripled since the company went public back in April 2012. Comparatively, the S&P 500 has gained over 300% in this period. SPLK stock is currently valued at a market cap of $19.6 billion and let’s see if it can outperform the broader markets in 2022 and beyond.
The bull case for SPLK stock
Splunk provides software and cloud solutions that deliver and operationalize insights from the data generated by digital systems. The Splunk Platform is a real-time data platform that consists of collection, indexing, search, reporting, analysis, monitoring and data management capabilities among others.
Splunk has managed to increase its sales from $1.27 billion in fiscal 2018 to $2.22 billion in fiscal 2021 that ended in January. However, similar to several other growth stocks that operate in the tech space, SPLK remains unprofitable and reported an adjusted loss per share of $0.55 in fiscal 2021.
In the fiscal Q3 of 2022, Splunk forecast sales of $660 million which was higher than Wall Street forecasts of $646.5 million. The company’s annual recurring revenue is forecast to rise by 37% while cloud-based revenue is estimated to grow by 75% year over year in Q3.
In Q2, private-equity giant Silver Lake Capital infused $1 billion in Splunk, the proceeds of which will be used to expand the latter’s cloud offerings.
In the quarter that ended in July, Splunk’s annual recurring revenue rose by 72% which was its 10th consecutive quarter of 70%-plus growth. In the last 12-months prior to Q2 the company doubled the number of customers that derived more than $1 million in annual cloud sales. Its cloud dollar-based net retention rate stood at 29% which suggests existing customers increased spending by 29% in the last year.
As the enterprise-wide shift towards cloud adoption gains pace, Splunk’s customers requested the option for a flexible pricing model. Splunk introduced workload-based pricing two years back that has allowed it to onboard customers at a quicker pace.
In Q2, over 80% of Splunk’s net new cloud ARR were derived from workload-based pricing which was an increase of 3x year over year. More than 25% of the company’s total cloud ARR is from customers utilizing workload-based pricing.
Key metrics for Splunk in fiscal Q2 of 2021
Splunk ended Q2 with total ARR of $2.63 billion and its cloud ARR stood at $976 million.
Splunk’s total customers with total ARR over $1 million rose 47% to 582 and the number of customers with cloud ARR more than $1 million more than doubled to 234. The company’s focus on cloud adoption drove close to $100 million in net new cloud ARR.
During its last earnings call, Splunk expected to surpass $1 billion of cloud ARR in the quarter with total ARR forecast between $2.8 billion and $2.825 billion.
Its full-year revenue for fiscal 2022 is forecast between $2.53 billion and $2.6 billion with a negative operating margin between 14% and 17%. However, it also expects free cash flow to touch $100 million in fiscal 2022. Splunk aims to enter the next fiscal year with its “customer base fully normalized with the annual billings and cash collections driving a significant increase in OCF next year.”
What next for SPLK stock?
Analysts expect Splunk to increase sales by 15.7% to $2.6 billion in fiscal 2022 and by 20% to $3.1 billion in fiscal 2023. This valued the SPLK stock at a forward price to 2023 sales multiple at just over 6x which is quite reasonable, compared to its peers.
Wall Street also has a 12-month price target of $180 for Splunk stock which is 30% above the current trading price.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
