As organizations rapidly migrate to the cloud, Splunk (SPLK) is witnessing increased demand for its data-platform and cloud-based offerings. Thanks to the favorable demand environment, Splunk once again delivered better-than-expected quarterly results. (Read more: Splunk Q2 Results Top Expectations; Issues Guidance)
Despite impressive quarterly performances, investors dumped Splunk stock, primarily due to the continued weakness in its bottom line. Splunk posted an adjusted loss of $87.1 million in FY21. Furthermore, it has posted an adjusted net loss of $249.9 million in the first six months of FY22.
TipRanks’ Stock Investors tool suggests that investors currently have a Very Negative outlook on Splunk stock, with 1.7% of investors who hold portfolios on TipRanks decreasing their exposure over the past month.
Given the selling, Splunk stock has declined about 8.8% on a year-to-date basis. (See Splunk stock charts on TipRanks)
While Splunk’s losses widened, I maintain a Bullish outlook primarily due to its solid operating metrics that have consistently increased, providing a solid base for the recovery in its stock. Its total ARR (annual recurring revenue) has grown by 50%, 54%, and 41% in FY19, FY20, and FY21, respectively.
It’s worth noting that the total ARR increased 37% year-over-year to $2.63 billion in Q2. Meanwhile, cloud ARR jumped 72% to $976 million. Splunk had 582 customers with a total ARR of over $1 million. Moreover, its customers with cloud ARR of more than $1 million doubled to 234.
This is important, as a growing number of customers with more than $1 million ARR indicates Splunk’s ability to attract large customers and grow its scale.
In response to Splunk’s Q2 performance, Needham analyst Jack Andrews highlighted the company’s ARR growth and an increase in $1 million ARR customers. The 5-star analyst remains optimistic due to “the combination of ramping OCF (operating cash flow) and a growing ARR renewal base.”
Andrews reiterated a Buy rating on Splunk and increased the price target to $203 (31% upside potential) from $198.
On TipRanks, SPLK commands a Moderate Buy consensus rating, based on 17 Buys and 10 Holds. The average Splunk price target of $169.04 implies about 9% upside potential to current levels.
Disclosure: On the date of publication, Amit Singh had no position in any of the companies discussed in this article.
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