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Almost Digitally Transformed, Splunk Sees Strong Growth Ahead
Stock Analysis & Ideas

Almost Digitally Transformed, Splunk Sees Strong Growth Ahead

Splunk (NASDAQ: SPLK) reported strong Q4 2022 results on Wednesday, wherein both the top and bottom lines topped Street estimates. SPLK stock has gained 4.2% this year.

New C-Suite Appointment Bodes Well

The highlight of the commentary was the appointment of Gary Steele as the CEO of Splunk. Steele was the CEO of cybersecurity company Proofpoint before it was acquired by private firm Thoma Bravo last year.

Interim CEO Graham Smith believes that Steele will bring in-depth knowledge of Software-as-a-Service (SaaS) and recurring revenue models to the table, thereby accelerating Splunk’s journey to $5 billion.

Moreover, the robust demand for cybersecurity amid the growing sophistication and incidents of cyber-attacks bodes well for the company as about half of the business operates in the Security space.

Needham analyst Mike Cikos believes that this announcement will buoy the confidence of investors, providing an upside to the stock prices.

Cloud Transformation Almost Complete

Management expects that most of the heavy work of its cloud transformation process has been done, and going further, expects Cloud to account for 70% of total software bookings in FY 2023, up from 62% in FY 2022.

This should lead to a convergence in revenues and annual recurring revenues. “Management intends to report ARR each quarter through the year, before retiring this metric at the end of FY23. With the transition largely complete, investors should shift their attention to Revenue and RPO growth,” noted Cikos.

Moreover, once the transition is complete, Splunk’s free cash flow is expected to get an impetus, which is evident from the company’s expectation to generate $400 million in operating cash flow in FY 2023 and grow thereafter.

Wall Street Weighs In

“In our view, Splunk represents one of the few open-ended growth stories in technology, since the more customers use the company’s software, the more those customers want to use it. We view Splunk as an industry leader with strong products attacking a huge market opportunity,” said Cikos, reiterating a Buy rating on the stock.

However, the analyst trimmed the price target to $145 from $181 following a transfer of coverage and usage of a different valuation multiple.

The rest of Wall Street is cautiously optimistic about Splunk, with a Moderate Buy rating based on 12 Buys and eight Holds.

The average SPLK price target is $151.71, which indicates an upside of 17.6% from current levels.

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