Machine learning is a subfield of artificial intelligence, and it's primarily used to make sense of mountains of data to deliver valuable insights to the end user. Thanks to companies like Splunk (SPLK), machine learning solutions are now available to any business, in any industry, so it's no longer exclusive to large tech companies.
Splunk is in the midst of a transformative shift to offer its services in the cloud to make them more accessible. The move is driving adoption, and that part of its business is growing rapidly. But after reporting its financial results for the second quarter of fiscal 2023 (ended July 31), investors sent the stock into the red.
The primary reason was a downward revision to Splunk's forward guidance. But here's why that might merely be a small bump on the road to long-term gains.
Serving the world's largest companies
Splunk's tagline is "turn data into doing," and it helps customers achieve just that. It continues to expand its portfolio of solutions that now span cloud migration services, data optimization, and even cybersecurity.
The best way to understand Splunk's impact on businesses is to explore how customers are using it. For example, over 3,000 Papa John's (PZZA 0.66%) stores have delivered millions of pizzas using Splunk's cloud platform, which is integrated into the company's website, point of sale systems, and all of the critical applications used in day-to-day operations.
Splunk constantly monitors the entire network and delivers real-time data to the Papa John's team. Is the website running too slowly? It's immediately visible with Splunk. Is there a problem inside one of the stores? In many cases, the head office is alerted before the store even contacts it, thanks to Splunk.
Plus, given the amount of visibility Papa John's now has over even the smallest parts of its business, the company has been able to identify potential improvements to the customer experience that simply went unnoticed before. This is all made possible thanks to Splunk's ability to ingest significant amounts of data and analyze it swiftly to provide actionable insights.
Splunk now serves 90 of the Fortune 100 companies, and the number of its customers spending over $1 million per year hit a new high of 723 in the recent second quarter, which was a 24% jump compared to the year-ago period.
Splunk's cloud services are driving growth
Of the 723 customers mentioned above, 352 of them are spending $1 million or more annually on Splunk's cloud offerings alone. That was an increase of 50% compared to the second quarter last year, which was more than double the 24% growth rate in this customer category overall.
As a result, the cloud has done wonders for Splunk's annual recurring revenue (ARR), which hit an all-time high of $3.33 billion in total during the recent quarter. Four years ago, cloud revenue was a fraction of the company's total sales, and now it makes up almost half. But the story is in the growth rate because since then, cloud ARR has grown at a compound annual rate of 74%, trouncing the 28% growth rate of non-cloud ARR over the same timeframe.
One of the most valuable things about Splunk's technology is that it can integrate with market-leading cloud platforms that companies are already using, like Amazon Web Services and Microsoft Azure. Splunk allows customers to take their cloud experience to the next level with those providers by delivering deeper, real-time insights.
Splunk stock is a buy on the dip
Splunk stock sank by 12% the day it reported its second-quarter results, mainly because the company moved its ARR guidance down from $3.9 billion to $3.65 billion for the fiscal 2023 full year due to uncertainty in the broader economy. Splunk stock has now declined by a steep 56% from its all-time high.
But the main challenge facing the company is profitability. Splunk is still investing heavily in growth, which is a wise thing to do when revenue is growing at such a fast pace. But in this market environment, investors want to see positive earnings because it means less risk.
With that said, Splunk is moving in the right direction. In the first six months of fiscal 2023, the company grew revenue by 33% overall compared to the first six months of fiscal 2022, but its costs remained almost completely flat. That resulted in an impressive 40% reduction in its net loss for the period, to $514 million compared to $854 million a year ago.
Splunk simply needs to find a balance that ensures it's still spending enough to grow, while keeping losses in check. After all, the machine learning industry is projected to expand by a whopping 44% each year between now and 2030 and could be worth $183 billion annually by then.
The company definitely doesn't want to miss out on capturing that opportunity, and nor should investors, which is why Splunk stock might be a buy while it's so heavily beaten down.
