Shares of Splunk (NASDAQ:SPLK) 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.

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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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.