The Internet software industry, of which
Splunk Inc.
SPLK
is a part is one of the few segments within the technology sector that continues to look bright. And that’s attributable to the way we have transferred so many of our routine activities to digitization in the last few years. Not just work, which includes digital collaboration of various kinds, but also shopping, sports, movies, music and other forms of entertainment.
The supporting digital infrastructure has therefore got to be maintained, operated and protected to ensure smooth delivery of services, low latency, consistent quality, improved customer satisfaction, and security. In the process, the system also gives up reams of data that can be analyzed using AI models to glean information and insights that can increase efficiency, while improving customer targeting and response, at times also anticipating problems before they occur.
One stock in this industry that has received a lot of love from analysts is Splunk. The company provides software and cloud-based solutions that deliver real-time insights to clients from the data generated by their digital systems. It operates both in the US and internationally.
Splunk’s real-time data processing platform offers collection, streaming, indexing, search, reporting, analysis, machine learning, alerting, monitoring and data management capabilities.
Its security solutions are used by cybersecurity departments to streamline security operations workflow, speed up threat detection and response, enhance threat visibility, and scale resources to increase analyst productivity through machine learning and automation.
While Splunk does offer other products and services, Gartner has recognized these two offerings. Accordingly, it has been declared a leader in IT Operations for Health and Performance Analysis (observability), a market it has an 8% share of. Its security solutions are even more compelling. Not only have they been placed as market leader in Security Information and Event Management (security), but they’ve also given the company a dominant 30% market share.
With over 13 years of experience in digital operations management, Splunk has a huge repository of machine-generated and human response data from over 14,500 customers. This has allowed the development of advanced ML systems for better insights and analyses for clients. It has also integrated with other digital systems to generate even more data. It is perhaps because of this advantage that the company has such a loyal user base.
Although there were some losses as the company migrated to a SaaS system, customer retention in recent quarters has been enviable with spending at existing customers continuing to increase. The subscription model of course improves visibility, which is a boon, especially as market uncertainties look set to increase in the near future. Increased spending at customers even in these uncertain times is encouraging, although it is perhaps to be expected given the increased efficiency that Splunk can enable.
Although trading at a 50%+ discount to its median value (on a P/S basis) over the last five years, the shares aren’t exactly cheap with respect to the S&P 500, which is trading at a 10% discount to its five-year median value. The shares usually trade at a premium to the industry as well as the S&P 500 although the gap with the index has narrowed this year.
The Debt/Cap of 117.3% is a serious issue, especially since the company also doesn’t generate any cash from operations. And acquisitions have led to substantial non-cash assets. Balance sheet cash ensures that there’s no imminent liquidity crisis.
Analysts currently expect Splunk’s 2023 (ending January) revenue to grow 29.7% and earnings to grow 242.4%. Both revenue and earnings are expected to grow strong double-digits in fiscal 2024 as well. The Zacks Consensus Estimate for the two years have jumped 74 cents (71.2%) and 68 cents (39.3%), respectively.
The company has solidly beaten analyst estimates in each of the last four quarters at an average rate of 222.0%. Since there are a large number of analysts covering the stock and there’s strong consensus between them on the tock’s upside potential, Splunk looks like a solid pick.
Splunk shares carry a Zacks Rank #2 (Buy). But the industry is full of attractive picks and one can just as easily choose between Zacks #1 (Strong Buy) ranked eGain
EGAN
, #1 ranked i3 Verticals
IIIV
, #2 ranked AppFolio
APPF
or #2 ranked Asana
ASAN
as well.
Year-to-Date Price Performance
Image Source: Zacks Investment Research
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