Splunk Inc . (NASDAQ:) is a U.S.-based company that provides software and cloud solutions internationally.
Its products allow users to gather better insight into machine data from various formats and sources. I am neutral on the stock. (See SPLK stock charts on TipRanks)
Cloud Growth and Earnings
Splunk blasted through earnings expectations with a revenue beat of $42.43 million and a non-GAAP EPS beat of $0.07. The company’s 23.2% year-over-year revenue growth was primarily due to the expansion of its Cloud business; Cloud recurring revenues rose by 72.2% year-over-year, while 234 customers with contracts worth more than $1 million were added, a 100% year-over-year increase.
Change in Subscription Strategy
Although Splunk has produced good results of late, it’s still to be known whether the company will return to its previous growth. Splunk changed its billing strategy in 2019, requiring subscriptions and renewals instead of proprietary licensing. Subscriptions are a popular model, and have a track record of success, but Splunk’s initial stock surge resulted from its perpetual strategy.
The stock value has decreased by nearly 30% over the past year, even during a tech boom. The lackluster performance may indicate that investors believe the stock is mispriced, based on its new billing model.
Certain Growth Multiples Are an Issue
Due to the company still being in a growth phase, you’d be wrong by analyzing the stock based on most multiples. Fortunately, the price-to-sales and price-to-cash flow ratios can be used at any stage of a company’s life cycle.
Splunk’s price-to-sales ratio (10.72) is trading 147.68% above its sector average, and five times above the generally excepted benchmark of 2.
The stock’s price-to-cash flow ratio of 203.51 is a tremendous problem if you’re seeking intrinsic value, as it’s currently trading at a 13x premium to benchmark.
The reason to focus on multiples is because of market circumstances. The market demands solid fundamentals at the moment due to economic factors, such as inflation, and slowing real GDP growth.
Wall Street’s Take
Splunk scores a Moderate Buy rating among Wall Street analysts, based on 18 Buys and 10 Holds. The average SPLK price target of $175.08 implies 12.9% upside potential.
Splunk could be an exciting prospect, and the change in its revenue model could be a key driver.
However, the stock’s priced in according to its prior licensing model, which has caused a down year in stock performance. The stock’s growth multiples reflect this.
It is thus unclear whether there will be a significant upside or downside.
Disclosure: On the date of publication, Steve Gray Booyens had no position in any of the companies discussed in this article.
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