Please ensure Javascript is enabled for purposes of website accessibility

Splunk Stock Is a Bargain After Fourth-Quarter Earnings

By Nicholas Rossolillo - Mar 6, 2021 at 8:24AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares of the leading data analysis platform have taken a beating, but the growth story is far from over.

Shares of Splunk (SPLK -2.07%) have taken a beating in recent months. The stock erased what was a 50% advance through last summer and is now down about 10% from where it was a year ago at the onset of the pandemic.

Yet in that time, the leading data analysis company has continued to grow -- driven by the popularity of its cloud-based software. However, as Splunk has been migrating its customer billing from legacy software to cloud, that growth still goes mostly misunderstood. Thus, Splunk is starting to look like a serious value.

Revenue declines ... sort of

As was the case all year, Splunk reported another decline in revenue during its fiscal 2021 fourth quarter (the three months ended Jan. 31, 2021). Revenue came in at $745 million, down 6% from the year prior. Of the total, cloud revenue was $171 million, up 72% year over year.  

To recap, this rapid transition from legacy software (billed to customers on a term basis) to cloud (billed upfront with revenue recognized over time) is responsible for the decline in revenue. The pandemic accelerated the transition for Splunk customers to the cloud model, meaning the company went from recognizing all of those billings upfront to now recognizing them over time.

No worries here, though, because using annual recurring revenue (ARR) -- all term- and cloud-based revenue -- gives the more accurate picture for fiscal 2021. Full-year revenue fell 5% to $2.23 billion, but ARR was $2.36 billion in the fiscal fourth quarter, up 41% year over year. That number topped the outlook management provided a few months ago.  

Even better, the outlook for the first quarter of the new year called for a sequential increase in ARR to $2.42 billion to $2.44 billion, up 37% from last year at the midpoint of guidance. As a reminder, Splunk's goal is to reach $4.6 billion in ARR by calendar year 2022.

Illustrated charts and graphs connected to a network icon

Image source: Getty Images.

A return to profitability

Splunk's results should begin to normalize this year, and growth looks poised to continue as the company sells its new software capabilities. Included among them is its new Observability Suite, designed to help users get a high-level view of their cloud-based operations and manage the new complexities that come with the cloud. E-commerce giant Shopify and identity management firm Okta were among the customers highlighted on the earnings call making use of Splunk's new cloud offerings.  

Along with this transition in use of the Splunk platform, the bottom line is also starting to stabilize. Free cash flow (excluding $44.6 million used in acquisitions during the fourth quarter) was negative $32.6 million in the latest quarter, compared to negative free cash flow of $106.4 million in the prior-year period.

Fiscal 2021 full-year free cash flow ended at negative $228.0 million, but a return to profitability is in the cards in fiscal 2022. Splunk ended the year with $1.86 billion in cash and equivalents and $2.30 billion in convertible debt.  

This data analytics company is far from perfect, but it's still on a growth trajectory and rebuilding its bottom line after making a bumpy transition to cloud software and billing. After the precipitous fall from all-time highs last year, shares trade for just under 10 times trailing 12-month sales.

With its closest peers trading for double that figure or more, Splunk is starting to look like a serious bargain if it can continue growing its ARR at a double-digit rate this year and the next. I'm a buyer after the fourth-quarter update.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Splunk Inc. Stock Quote
Splunk Inc.
SPLK
$95.68 (-2.07%) $-2.02
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$360.62 (-3.23%) $-12.02
Okta Stock Quote
Okta
OKTA
$78.77 (-9.96%) $-8.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
349%
 
S&P 500 Returns
122%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.