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3 Reasons Why Splunk Is a Buy

By Robert Izquierdo - May 5, 2021 at 7:15AM

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The data company's stock price is hovering around a 52-week low. Find out if it's worth buying.

Data analytics firm Splunk (SPLK 2.77%) lost its chief technology officer, Tim Tully, this week when he transitioned to a partner role at Menlo Ventures. When the news broke back on April 16, Splunk's stock price plunged as Wall Street analysts downgraded the company.

The stock is now trading around a 52-week low. Does the price drop create a buying opportunity? I think so. Here are three reasons why Splunk is still a worthwhile investment.

Digital icons of charts float before circuitry with the word "data" in the corner.

Image source: Getty Images.

1. Splunk has an ongoing growth opportunity

Splunk operates in the Big Data industry, a market on track to grow from $41.3 billion in 2019 to $116.1 billion by 2027. For fiscal year (FY) 2021, which ended Jan. 31, Splunk's share of this market totaled $2.2 billion in revenue. So there's plenty of room for Splunk (and its competitors) to tap into sales increase potential over the next several years.

Splunk now has more than 500 large, enterprise-level clients in FY2021, up from 355 in the prior year, illustrating the company's success at attracting deep-pocketed customers. These clients each generate total annual recurring revenue (ARR) of over $1 million.

Splunk's technology collects and analyzes data for critical IT needs such as cybersecurity and IT infrastructure monitoring. The company also has a robust revenue stream from maintenance, training, and other customer support functions. This part of its business represented nearly a third of Splunk's revenue, earning $703.9 million in FY2021, up from $673.2 million the previous year.

The company has steadily increased its revenue for years, but that changed in 2020, in part due to the coronavirus pandemic's impact.

SPLK Revenue (Quarterly) Chart

Data by YCharts.

Splunk's FY2021 revenue represented a 5% decline from the prior year's $2.4 billion. These results caused the stock price to dip, and the price dropped further after Splunk's CTO departure sparked analyst downgrades.

Along with the pandemic, revenue dropped for another reason: Splunk is in the midst of transforming its business to capture the upside of another hot IT trend, cloud computing.

2. Splunk is making a successful cloud transition

Many businesses are adopting cloud computing services thanks to its convenience and lower cost compared to on-premises technology. The cloud computing industry is projected to rise from over $250 billion in 2020 to over $360 billion by 2022. As a result, Splunk began transitioning its products from on-premises to cloud-based software-as-a-service (SaaS) offerings a few years ago.

Historically, Splunk's customers purchased multi-year, perpetual licenses, and were billed upfront for them. Splunk's move to cloud services resulted in customers making smaller payments on an annual basis. This transition caused Splunk's revenue to drop, as Q4 marked the first time a majority of the company's software bookings came from its cloud offerings.

Given the move to a subscription model, a more accurate measure of Splunk's performance is annual recurring revenue. And its cloud ARR has experienced strong year-over-year growth.

Quarter Cloud Annual Recurring Revenue YOY Growth
Q4 2021 $810 million 83%
Q3 2021 $630 million 71%
Q2 2021 $568 million 89%
Q1 2021 $480 million 82%
Q4 2020 $442 million 80%

Data source: Splunk. YOY = year-over-year.

This growth reveals Splunk's offerings remain popular. CFO Jason Child remarked during Splunk's March 3 earnings call that the company's cloud business is expected to continue growing quickly since it doesn't demand large upfront payments, which customers are hesitant to make amid the pandemic.

3. Splunk's international expansion is on track

Another bright spot is Splunk's international business. In FY2021, international income rose to represent 34% of total revenue, up from 29% the year prior.

Fiscal Year Total Revenue International Revenue % of Total
2021 $2.2 billion $762.1 million 34%
2020 $2.4 billion $682.5 million 29%

Data source: Splunk. YOY = year-over-year.

Splunk plans continued investment in international expansion as part of its growth strategy. CEO Doug Merritt noted that the company's international business experienced a strong shift toward cloud adoption last year. He stated the pandemic "emphasized the need for every organization to pivot to cloud and invest much more strongly" in cloud solutions.

Splunk, like many companies in the tech sector, was not profitable in FY2021 as it poured earnings into its technology platform to fuel growth. But Splunk exited the year with a strong balance sheet. Its cash and equivalents ballooned to $1.8 billion, up from FY2020's $778.7 million. Its total assets of $5.9 billion outweighed total liabilities of $4.3 billion.

The loss of its CTO won't slow Splunk's cloud transition, since it's already well underway. In fact, on the strength of its cloud business, Splunk forecasted 2022 first-quarter revenue of at least $480 million, an increase over the prior year's $434 million. This signals a return to positive year-over-year growth, making now a good time to invest in Splunk.

Robert Izquierdo owns shares of Splunk. The Motley Fool owns shares of and recommends Splunk. The Motley Fool has a disclosure policy.

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