Shares of cloud-based data analytics company Splunk (SPLK) have been stuck in the gutter for quite a while. After a decent second quarter (Q2 of Fiscal 2022) that revealed a slightly narrower-than-anticipated per-share loss, shares have begun to gain some meaningful traction.
Strong recurring cloud sales growth and coming catalysts could support a continued rally back to all-time highs. In any case, I am bullish on SPLK stock. (See today’s best-performing stocks on TipRanks)
Cloud Transition Can No Longer Mask Solid Growth
Undoubtedly, the firm’s ongoing cloud transition paved the way for a much rockier road in the stock over the past year. Currently down more than 20% over the past year, SPLK has vastly underperformed its peers in the cloud scene. This is because investors turned their backs against unprofitable high-multiple stocks, especially those that failed to impress analysts.
With Q2 sales surging to $606 million, up 23% year-over-year, and total average recurring revenues (ARR) jumping an impressive 37%, it’s hard to mask Splunk’s strength any longer. Cloud ARRs were up an even more impressive 72%, to around $976 million.
ARRs, as opposed to revenues, are touted by management as being the preferred metric to gauge the company’s growth amid the ongoing cloud transition. With second-quarter ARRs topping management’s own forecast, Splunk looks in great shape to play catch-up to its much better-performing peers in the cloud space over the year ahead.
The transition from licenses to cloud subscriptions has introduced a bit of a haze surrounding recent results. However, it’s becoming more apparent that Splunk’s business is not under top-line pressure as previous stock price movements and revenues (as opposed to ARRs) may have suggested.
Cloud transitions aren’t fun for companies nor their investors. Still, over the long run, such transitions tend to be well worth the hassle.
Whether we’re talking about Adobe (ADBE) and its magnificent move into the cloud or AutoDesk (ADSK), which is also undertaking a big cloud transition, the odds seem to be on the side of long-term investors who stick around despite potential transition risks and any nearer-term negative impact on a company’s numbers.
Indeed, cloud transitions can put an ugly mask on a company’s results. For those that can see behind the mask, though, there may be much value to be had. With compelling new catalysts on the horizon, investors have a reason to get excited about the cloud underperformer as the band-aid of the cloud transition continues to be peeled off.
Splunk’s Public Push Could Fuel Meaningful Growth
Last week, Splunk announced its Government Logging Modernization Program to help the U.S. get up to speed with cybersecurity requirements. Undoubtedly, Joe Biden’s executive order to prioritize cybersecurity is a significant reason for the initiative.
This isn’t Splunk’s first dealing with the U.S. government, and it’s unlikely to be its last. As the company moves further into the public sector, the data analytics play may have a means to further expand upon its already solid growth profile. Heavy government involvement has worked out well for companies like Palantir (PLTR).
As Splunk increases its standing with the U.S. government, the misunderstood analytics firm may grow to become that much more exciting. Splunk will likely be looking to win more business from a government with an increased appetite for leveraging next-generation technologies to give itself an edge in defense and security.
Wall Street’s Take
Turning to Wall Street, SPLK has a Buy consensus rating, based on 15 Buys and six Holds assigned in the past three months. The average Splunk price target of $181.41 implies 7.4% upside potential. Analyst price targets range from a low of $153.00 per share to a high of $210.00 per share.
The Bottom Line on Splunk
In due time, the hazy clouds of Splunk’s transition will pass, and exciting new developments such as the government contracts could propel SPLK back to its former glory.
Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.
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