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Everything Investors Need to Know About Splunk

By Nicholas Rossolillo – Updated Aug 4, 2017 at 11:25AM

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If you think the processing of big data will grow in importance, this tech company is worth spending some time with.

It has been an up-and-down couple of years for shareholders of Splunk (SPLK 3.49%). In a world increasingly reliant on the processing of big data, the company is well positioned for growth. What happened, and what does the company have planned?

SPLK Chart

Data by YCharts.

Spying on the machines

We live in a world that generates more data than ever before. Countless numbers of human decisions and interactions happen every day, and businesses have a need to collect and analyze that information.

Enter Splunk, which operates specifically within the "machine data" area of big data. Machine data deals with the information generated by a company's IT equipment, be it employee computers, payment processing terminals, or industrial machinery with an internet connection-enabling device. Here's a Splunk video explaining what machine data is.

Much of that information that businesses collect goes unorganized and unused. Splunk's software helps businesses sort, organize, monitor, and gain insight on that data. That ability can help an organization increase the efficiency of operations, see what's happening in real-time, and monitor potential threats to the business.

An illustrated picture of machine data being collected around the world.

Image source: Getty.

Adjusting the angle of approach

Splunk was founded in 2003 and became a public company back in 2012. In a short five year time span, the company has grown from about 4,800 customer and $100 million in revenue to over 13,000 customers and $1 billion in revenue as of the last earnings report.

Management's new goal is to reach 20,000 customers and $2 billion in revenue by the year 2020. To pull that off, a few changes were needed. The first had to do with adjusting sales strategy to favor subscriptions instead of license agreements and cloud-based services rather than on-premises software. The hope is that will make revenue more stable and predictable.

A slew of changes were also made in the company's salesforce to help make the way for those 7,000 new hoped-for customers. In spite of those changes, first quarter results showed operating losses narrowing to $97 million from $98 million last year, halting what was a growing divide between the company's top and bottom lines.

SPLK Revenue (TTM) Chart

Data by YCharts.

A long and promising runway

For the next few years, Splunk is all about squeezing as much growth out of its business model as it can, and it will worry about profitability later. Revenue grew 30% year-over-year during the first quarter on the back of nearly 500 new clients and expanded service agreements with existing customers. Q2 revenue is expected to come in about 25% higher than last year and about 26% higher for the full year.

The major catalyst for Splunk since going public has been strong revenue growth, but that trend is starting to slow down. Revenues were up 80% in 2012 when the company went public, but during its investor presentation back in January management said to expect that number to slow to about 25% to 30% through 2020.

Those are still great numbers, but Splunk's improving profit margins provide an even more compelling reason for it to resume its rise. Operating profit margins are expected to increase to 12% to 14% by 2020, up from about 6% relayed during the last investor meeting.

As a result of those margins increasing along with revenue, Splunk has plenty of free cash flow, and it is still going up.

SPLK Free Cash Flow (TTM) Chart

Data by YCharts.

Big data is a young business with lots of potential. Splunk hit on that potential early on in the internet era and is the market leader in the industry. If you believe the use of big data will continue to grow in importance, Splunk is a great place to begin looking.

Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Splunk. The Motley Fool has a disclosure policy.

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