Machine learning is a subfield of the continually expanding artificial intelligence industry. It's focused on making sense of mountains of data to help companies find extra performance within their operations and processes.
The machine learning segment is relatively small, with an expected value of just $21 billion in 2022. But it's set to explode almost tenfold to $209 billion by 2029, and Splunk (SPLK) is one of the companies best positioned to benefit.
The company has shifted its focus in recent years to delivering its platform in the cloud to make it more accessible, and it has been a powerful driver of growth. Splunk stock has dipped 38% amid the broader tech sell-off, and here's why that's a buying opportunity.
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A broad use-case
The usefulness of machine learning tools can be observed through their adoption, and right now, Splunk serves 90 of the Fortune 100 companies. As more of the economy has shifted online in recent years, companies that generated only limited amounts of data previously are finding themselves flooded with new, potentially valuable information. Machine learning helps them to extract that value, and it can do so in a variety of ways.
A key feature of Splunk's technology is the ability to ingest, analyze, and interpret data in real time. That's why it can be used effectively in applications like Formula 1 auto racing, where the McLaren team relies on Splunk to deliver insights on a dashboard that's clean and easy to read. Splunk can draw upon data from the car's 300 sensors to rapidly hunt for a performance edge even in the middle of a race.
But in the age of online commerce, even business decisions need real-time analysis, and they need it around the clock. Take Domino's Pizza, for example, which uses Splunk to actively monitor at least 15 different digital sales channels to inform the company of technical issues or potential areas of improvement. Plus, Domino's relies on Splunk Phantom to manage cybersecurity threats, predict vulnerabilities, and protect valuable customer data.
Fielding a race car and making a pizza couldn't be any more different, and that alone highlights the breadth of Splunk's capabilities.
The cloud is a game-changer
The cloud is a revolutionary technology that allows companies to access their digital assets, workflows, and applications online. It means teams can work collaboratively even if they're not in the same physical location, and it enables Splunk's customers to access valuable insights from basically anywhere.
The cloud has accelerated the adoption of Splunk's suite of services, driving a growth surge in the process. It represented 48% of the company's $674 million in revenue in the recent fiscal first quarter of 2023 (Splunk's fiscal year ends Jan. 30), and that share continues to increase because cloud revenue has consistently grown at more than twice the pace of Splunk's overall revenue. While that spread has narrowed, the cloud still remains the dominant source of growth.
In the fiscal first quarter, Splunk had 690 customers spending over $1 million annually. That figure has grown by 86% in the last two years. But over the same period, the number of customers spending $1 million or more on cloud-based services rose from 102 to 329, a jump of 222%.
Why Splunk is a buy now
Splunk operates on a recurring-revenue model, typically referred to as software as a service (SaaS). In the recent quarter, the company's annual recurring revenue hit an all-time high of $3.2 billion, and that could soar as high as $3.9 billion in the current fiscal year. But it's a drop in the bucket compared to what Splunk estimates is a $100-billion total addressable market, which leaves a long runway for growth.
The company's net retention rate for its cloud-based offerings remains exceptionally high at 130%. It effectively means that Splunk's existing customers are spending 30% more than they were in the same period last year, which speaks to their level of satisfaction with the company.
Splunk isn't profitable just yet, but it's making progress. It lost $304 million in the first quarter, which was a much better result than the $471 million loss in the year-ago period. In the current market environment, where the Nasdaq-100 technology index is trading in bear territory, profitable companies are in favor right now, which partly explains the 38% dip in Splunk's stock price.
But Spunk is certainly trending in the right direction, and its high gross profit margin of over 74% offers plenty of flexibility to manage costs to deliver earnings down the road. For now, investors should focus on the substantial progress the company is making to deliver game-changing technology that continues to grow in popularity.
