Is Splunk Moving in the Wrong Direction?

On Thursday, Splunk (SPLK +0.00%) will release its latest quarterly results. With the company's stock having rebounded sharply from a post-IPO slump last year, investors have to wonder when Splunk will finally become profitable.

Splunk's potential comes from its presence in the growing cloud-analytics space. With companies gathering incredible amounts of data, they need help making sense of it and using it to optimize their business efficiency, and Splunk's services give users the opportunity to get more from the information they gather. Let's take an early look at what's been happening with Splunk over the past quarter and what we're likely to see in its report.

Stats on Splunk

Source: Yahoo! Finance.

Will Splunk start earning its keep this quarter?
One sign that Splunk's earnings might be going in the wrong direction came from analysts in recent months, who doubled their loss estimates for the April quarter and reduced their full-year consensus to break-even from a modest profit. But the stock has soared 35% since late February on optimism that the company is maintaining its strong revenue growth.

Splunk is definitely in the right place at the right time, with data-center growth having become a constant of the tech industry. Many of the biggest players in technology have turned to the big data movement to try to find higher-margin business to replace flagging results in other segments, and the success of data-mining business models has established the value of finding the right tools to analyze and utilize analytical information.

But one big element pushing Splunk's stock higher was the buyout offer that rival BMC Software (BMC +0.00%) received earlier this month. A group of private investors that includes Bain Capital made the $6.9 billion offer for BMC, and with activist investor Elliott Management having blessed the deal, it's likely to go through. The strategic move establishes the value of companies in the data-analytics space, especially given that BMC had already lost its competitive edge against Splunk and other rivals.

In addition, the IPO of Tableau Software (DATA +0.00%) has returned attention to the sector. With Tableau having gained 64% on its first day of trading, investors clearly have strong expectations for the company, which specializes in data visualization. In particular, Tableau has gross margins that put even Splunk's near-90% figures to shame, and if Tableau can retain that advantage, it could pose a long-term threat to Splunk.

In Splunk's quarterly report, pay special attention to figures that the company gives about major new customers and retention rates among current clients. With a big increase in competition, it's critical for Splunk to hold onto the business it currently has while aggressively moving forward with plans to acquire new business. Moreover, the stronger Splunk can make itself, the more attractive it might look to a potential buyer of the company if the consolidation trend continues.

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