Imagine for a moment you're part of the McLaren Formula 1 racing team. During a race, your information technology system has to absorb 1.5 terabytes of data from 300 telemetry sensors on the car. But it doesn't end there.

You need the ability to interpret all of that data -- in real time -- to make incremental adjustments in the middle of the race based on track temperature, weather, and tire choice, to name just a few variables. Not to mention, 18,000 parts are changed on the race car every six weeks, which will contribute brand new data during each race.

Manually drawing any sort of value from all of that information in a live environment would be impossible even if you had the help of 100 teammates. What you need is machine learning, and that's where Splunk (SPLK) comes in. 

The company serves thousands of customers just like McLaren with high-stakes analytical requirements, helping them to make sense of the data generated by their operations. Splunk just released its financial results for its fiscal 2023 (which ended Jan. 31), and they offered investors plenty of reasons to be optimistic.

Moreover, Splunk's share price plunged amid the broader sell-off in the technology sector, and is now 55% below its all-time high. Here's why that could be a buying opportunity.

A racing crew servicing a race car in the pit lane.

Image source: Getty Images.

Splunk serves a rapidly growing need

Cloud computing has changed the corporate world forever. It allows companies to shift more of their operations online, which drives efficiency, and to build digital sales channels to reach consumers anywhere in the world. But that transition has created a new challenge: Organizations are now generating and capturing mountains of digital data in the course of their everyday business that they don't have the expertise to process and analyze effectively.

Splunk's platform can ingest that data in a live environment, process it in seconds, and spit out valuable, actionable insights.

Take Domino's Pizza, for example. You probably wouldn't associate the chain with machine learning, but that technology powers many of its crucial decisions. Domino's has more than 15 digital sales channels from smartphones to smart TVs, all of which generate data on customer habits. That data passes through Splunk in real time to monitor how customers are responding to certain products, and also to monitor security and general operations. The insights generated can be used to guide marketing decisions, develop new products, and even create new sales channels.

Making pizzas and building race cars could not be more different tasks, but their success is unified by a common denominator: data. To quote the company's former motto: Splunk turns data into doing.

Splunk's financials continue to grow nicely

Splunk is making substantial financial progress by offering its platform in the cloud as well as through on-premises hardware. Its annual recurring revenue topped $3.67 billion in its fiscal 2023, but the cloud portion of that is growing at a compound annual rate of 64%, which is nearly triple the rate of its non-cloud segment. 

Large organizations continue to flock to its tools, which makes sense given their operations are typically more complex and data heavy. Splunk now has 790 customers that spend at least $1 million per year on its services, including 422 that spend at least that much on cloud-based iterations alone.

The cloud presently provides more than half of Splunk's bookings each quarter, and it's also driving longer contract durations. In fiscal 2023 Q4, its average cloud customer was committed for 26.2 months compared to 21.7 months for non-cloud customers.

Investors might want to buy Splunk stock now

In April 2022, Splunk appointed Gary Steele as its new CEO. He brought a swathe of software services experience to the table, and one of his goals was to move Splunk toward profitability while maintaining durable growth.

In fiscal 2023 Q4, the company earned net income of $268 million which was a drastic improvement from its $140 million net loss in the prior-year period. Plus, Splunk narrowed its annual net loss to just $277 million, down from a whopping $1.3 billion in its fiscal 2022. 

A more disciplined approach to expenses drove the bottom-line improvement. Splunk's operating costs in fiscal 2023 were $3 billion, basically flat compared to fiscal 2022, while it added almost $1 billion in revenue that flowed straight through to the bottom line. 

In another milestone, Splunk took in revenue of $1.25 billion in its Q4 -- the first quarter it ever topped the billion-dollar mark. 

But for all of the company's progress, management says it has barely scratched the surface of its addressable market, which it says could be a $100 billion opportunity. With Splunk stock down 55% from its all-time high, this might be a great time for investors to buy in, before the company captures even more of that value.