Before the tech-stock rout that kicked off 2022, shares of data analytics firm Splunk (SPLK -0.04%) were already battered by the departure of its CEO last November. The stock had reached a 52-week high of $176.66 just days before the CEO's departure was announced. Now shares are around $118 at the time of this writing.

A bearish outlook toward Splunk is understandable since the heart of every good organization is its leadership team. But analyze the company and it's clear that it has notched many accomplishments.

One of Splunk's key objectives is to transition away from selling software licenses, switching to a cloud-based software subscription model. Digging into this and other aspects of its business illustrates why Splunk is a solid long-term investment.

A team of employees huddle around a computer, analyzing and discussing data on the screen.

Image source: Getty Images.

Leadership remains strong

Splunk's CEO departure may sound alarming on the surface. However, the company has talented leaders to carry the torch.

The chairman of Splunk's board, Graham Smith, stepped in to fill the CEO void while a replacement is found. Mr. Smith was previously the CFO of successful tech company Salesforce, which, like Splunk, focuses on software-as-a-service (SaaS) cloud computing.

The company brought on Teresa Carlson in 2021 as chief growth officer overseeing sales, marketing, and other go-to-market operations. She came to Splunk from AWS, Amazon's successful cloud-computing arm.

Splunk also hired Shawn Bice last year as president of products and technology. Mr. Bice spent years at AWS and at Microsoft before that. With experience from two of the biggest cloud-computing companies in the world, Mr. Bice has the expertise to keep Splunk's technology evolution on track.

Splunk's cloud transition turns a corner

That evolution involves transitioning Splunk's clients to the cloud. For the last few years, Splunk has been on a journey to move to a SaaS model. This allows clients to pay a low recurring fee instead of shouldering high up-front costs to buy a license. For Splunk, subscriptions provide a consistent revenue stream.

This initiative turned a corner last year. Through the company's first three quarters of fiscal year 2022, which ended October 31, Splunk's cloud business was on track to finish the year with more revenue than licensing for the first time.

Fiscal Year Cloud Services Revenue Licensing Revenue Maintenance and Service Revenue Total Revenue
2022 (First nine months only) $654.4 million $611.9 million $506.2 million $1.8 billion
2021 $554.1 million $971.4 million $703.9 million $2.2 billion
2020 $312.4 million $1.4 billion $673.2 million $2.4 billion
2019 $171.2 million $1.0 billion $601.5 million $1.8 billion

DATA SOURCE: SPLUNK.

Splunk forecasts full-year revenue for fiscal year 2022, which ended January 31, to hit at least $2.5 billion. This would be a record high for the company.

Splunk's cloud revenue is poised to expand further in the years ahead thanks to the cloud-computing industry's growth. According to research firm Gartner, global cloud revenue will reach $474 billion this year from 2021's $408 billion.

Gartner also estimates the digital work executed on cloud platforms will increase from 30% in 2021 to over 95% by 2025. As more digital workloads move to the cloud, Splunk's revenue rises since its pricing goes up as data volume increases. Splunk is already experiencing this according to Teresa Carlson, who stated that the company is seeing "net new workloads across the board."

Strong recurring revenue

Since the subscription model collects fees over time, quarterly revenue numbers don't capture the full value of Splunk's customers. Annual recurring revenue (ARR), which measures the annualized run rate of Splunk's customer contracts, is a better metric to assess performance.

Here, Splunk is doing well. Its Q3 cloud ARR reached $1 billion for the first time as it continued consecutive quarterly growth.

Fiscal Quarter Cloud Annual Recurring Revenue YOY Growth
Q3 2022 $1.11 billion 75%
Q2 2022 $976 million 72%
Q1 2022 $877 million 83%
Q4 2021 $810 million 83%
Q3 2021 $630 million 71%

DATA SOURCE: SPLUNK. YOY = year-over-year.

Even so, Splunk isn't profitable. Its Q3 net loss was $343.3 million, but this isn't a cause for concern since many tech companies operate for years at a loss to pursue growth.

And Splunk's growth is likely to continue. The advent of secular trends in the Internet of Things, the metaverse, and more mean a tidal wave of data that will only increase. That's why the global Big Data market is projected to expand to $116.1 billion by 2027, up from $41.3 billion in 2019.

Demand for Splunk's services will grow as businesses need help to capture, analyze, and surface insights from all this data. Splunk already serves 90 of the Fortune 100 companies and was granted elevated Department of Defense government clearance in Q3, a testament to its platform's capabilities and security, with the U.S. Navy expanding use of Splunk in that quarter.

So while the loss of its CEO is unwelcome news, Splunk is well-positioned to continue growing in the years ahead, making Splunk a good long-term investment.