What happened

Shares of Splunk (SPLK) gained 32.7% in the first six months of the year, significantly outperforming the broader market, according to data from S&P Global Market Intelligence. The stock's climb was propelled by the company's new partnership with Alphabet, encouraging first-quarter results, and momentum for the broader data analytics industry. 

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Concerns about how COVID-19 would impact the company contributed to a big sell-off in Splunk stock in March, but the pandemic and responses to it also pushed more business into the digital sphere. As companies increase their reliance on analytics to shape their strategies and products, that should create long-term tailwinds for Splunk. 

A person touching an AI icon in the middle of a network of points and lines.

Image source: Getty Images.

So what

Splunk stock lost some ground after the fiscal fourth-quarter results it published in March fell short of the market's expectations. The company posted non-GAAP earnings per share of $0.96 on sales of $791 million, while analysts' average estimate had been for earnings per share of $0.97 on sales of $783 million. The coronavirus sell-off that was rocking the broader market hit the stock soon after, but Splunk's valuation recovered as the market rebounded.

Early in May, Splunk that it was bringing its enterprise search and analytics functions to Alphabet's Google Cloud. It followed up the promising partnership news with better-than-expected fiscal first-quarter earnings results a few weeks later. For the period that ended April 30, the company reported an adjusted loss of $0.56 per share on sales of $434 million, while the analysts' average estimate had been for a loss of $0.57 per share on sales of $443 million.

Sales fell short of the market's target in fiscal Q1, but the company's transition to a cloud and subscription-focused model continued at an impressive pace. Annual recurring revenue rose 52% year over year, and cloud revenue climbed 81% in the period. 

Now what

Splunk expects its annual recurring revenue to expand in the mid-40% range this year, and forecasts operating cash flow in line with the $288 million cash burn it posted last year. Management is targeting revenue of approximately $520 million in the fiscal second quarter, suggesting roughly flat performance compared to the prior-year quarter.

Splunk is valued at roughly 84.5 times this year's expected earnings and 13 times expected sales.