Amid the coronavirus pandemic and an economy stuck in recession as a result, U.S. stock market indices have come roaring back to all-time highs. You can thank technology stocks for that.
Though the world is far from being in a good place at the moment, security, cloud computing, and digital payment services are in high demand. Splunk (SPLK), Anaplan (PLAN), and StoneCo (STNE -0.20%) all released better-than-expected second-quarter earnings and are a buy in my book for the month of September.
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Digital data monitoring and analysis moves to the cloud
Splunk has been migrating its data monitoring and analytics software service to the cloud, and with the move comes accounting changes. As I outlined a few months ago, a cloud software contract's revenue is recognized over time, versus a term contract where all revenue is recognized up front. Annual cloud subscriptions started the current year at 35% of Splunk's annual software bookings, but surged to 50% in the first half of fiscal 2021. Put simply, a revenue decline of 5% to $492 million in the latest quarter doesn't tell the whole story.
During its transition to a more modern business model, using annual recurring revenue (or ARR, which combines all cloud and term contract sales) provides a clearer picture. And during the fiscal second quarter (three months ended July 31), Splunk's ARR grew 50% from a year ago to $1.93 billion -- including an acceleration in cloud-specific ARR to 89% year-over-year growth to $568 million. In other words, as COVID-19 has forced many organizations to adopt new means of operating their businesses, Splunk is being turned to as a trusted partner.
Splunk can be put to use in myriad ways like the coordination of cybercrime prevention, monitoring of IT infrastructure and application performance, and conversion of raw data into actionable insights, to name just a few. The broad scope of its offerings and the massive shift to a digital-first world gives this software company plenty of levers to pull on its growth journey. ARR is expected to grow at an average rate of 40% a year through the next three years, which equates to a long-term ARR outlook of some $4.6 billion (using fiscal 2020 ARR of $1.68 billion as a starting point).
By fiscal 2023, management expects to generate operating cash flow of $1.0 billion a year, good for a healthy cash flow margin of about 20%. Considering this and the newfound importance of the sandbox it plays in, and its momentum in transitioning to a new business model, I think shares currently trading for 15 times revenue are a pretty good place to park some cash for at least the next few years. Splunk remains my favorite pick in the data monitoring and analysis software industry.
Enterprise planning makes a comeback
Some names within the tech industry are facing a significant slowdown in their growth story due to the pandemic. That was the worry facing enterprise resource planning (ERP) software upstart Anaplan. However, second-quarter revenue grew 26% year over year, including a 32% increase in the all-important "subscription revenue" segment to $97.1 million, handily outpacing the gloomy guidance provided at the onset of the crisis. Full-year guidance -- calling for a 26% rise in revenue over last year -- was also put back into place.
It would seem that many organizations have paused some of their new IT spending, but as the gears start turning again, a new type of ERP is needed, and Anaplan fits the bill. Its cloud-native platform helps connect all of a company's digital data and systems to people and teams, informing good decision-making and helping with organization-wide planning. Whether it's finances, sales, marketing, or logistics, Anaplan's machine learning-enabled platform is a formidable competitor to long-established offerings from industry stalwarts like Oracle and SAP.
I think this brand of cloud ERP will be an important tool for many in a world post-COVID-19. Adding to Anaplan's solid performance during the peak lockdown period, adjusted operating losses narrowed to $9.6 million during the quarter compared to an adjusted loss of $16.6 million a year ago. And with $305 million in cash and equivalents and zero debt on the books, this ERP disruptor is well-positioned to keep making waves.
Based on current year guidance, Anaplan trades for just shy of 20 times sales -- not exactly cheap. But given its better-than-expected update and customers starting to ink deals as the effects of the pandemic slowly wear off, I'm a buyer of this software firm.
Brazil's migration to digital payments rolls on
Latin America's largest nation and leading economy trails only the U.S. in highest number of COVID-19 cases, but the economy is nonetheless showing signs of a quick recovery. Brazil, like many other developing nations, can't afford to completely close down because of the pandemic. But many consumers are turning to increased use of e-commerce amid the health crisis.
That has played to StoneCo's favor. The fast-growing digital payments company notched a slowdown in its revenue growth during the first quarter to "only" 34%. In the following period, revenue fell to a 14% year-over-year increase on total payment volume (TPV) gains of just 28%. However, in the month of July (the first month of the third quarter), StoneCo said TPV accelerated to 129% over July 2019 levels -- an exceptionally good portent for the company as Brazil's economy comes roaring back.
Digital payments are still a small percentage of exchanges in the South American nation, and e-commerce is just a mid-single-digit percentage of total consumer purchases. StoneCo thus has a massive opportunity ahead of it as it helps merchants move away from cash and accept digital transactions both in-person and online. In tandem with quarterly results, Stone also said it made an offer to acquire complementary Brazilian ERP and retail software company Linx, furthering its lead as a one-stop shop for business owners' financial and technology needs.
The path that lies ahead of the company is wide open with the opportunity to help build a new economy in Brazil based on e-commerce. Shares are up 30% this year and trade for 25 times one-year forward revenue estimates. It's a steep premium, but this digital payments leader is living up to the hype even during the pandemic. I think it's worthy of the price tag, given the fast rebound to triple-digit TPV gains in July and the acquisition of Linx only deepening Stone's lead in Brazil's burgeoning digital commerce market.
