The professionals on Wall Street don’t always get things right, but when a clear consensus emerges, it’s worth paying attention. A group of analysts tracked by The Wall Street Journal is collectively very bullish on Splunk (SPLK), a machine learning powerhouse that is chasing a $100 billion market opportunity.
The company just released its financial results for the third quarter of fiscal 2023 (ended Oct. 31), and it revealed red-hot top-line growth with a drastic improvement in its bottom-line losses. Here’s why Wall Street is backing Splunk stock, and why investors should consider following its lead.
Splunk takes machine learning to the cloud
Splunk has developed advanced machine learning technology to help businesses draw unique insights from their everyday operations and customer interactions. With the onset of cloud computing, more organizations are conducting business online, and generating mountains of data is a side effect of that shift.
Splunk’s specialty is ingesting that data in real-time and producing actionable information. Take the McLaren Formula 1 racing team, for example. It uses Splunk to analyze the live data produced by each of its cars in a race environment, to draw insights instantly that it can use to make critical decisions.
Splunk is in the midst of a seismic shift in its business model, because it now offers its services in the cloud so customers can access them from anywhere. As of Q3, it had 380 customers spending at least $1 million annually on its cloud-based platforms, up 40% year over year, which is twice the growth rate of its non-cloud customer additions in the same spending bracket.
But there are now three prongs to Splunk’s business: the flagship Splunk platform, plus Splunk Security, and Splunk Observability, the combination of which presents a $100 billion addressable opportunity.
Splunk’s Q3 financial results were overwhelmingly positive
Splunk’s focus on the cloud is supercharging its financial results. Its total annual recurring revenue (ARR) topped $3.4 billion in Q3, but again, the cloud is dominating in terms of growth. Cloud ARR expanded by a whopping 69% annually over the last four years, whereas non-cloud ARR increased by just 26%.
In the recent quarter, Splunk’s total revenue grew by 40% year over year, but the cloud segment soared by 54% and it quickly became the largest portion of its business overall.
But the story of Q3 was the company’s substantial progress toward reaching profitability; the three charts below outline that journey.
It’s often counterproductive to try to force revenue through the door when the economy is weak, so in such environments, good managers tend to manage costs. That’s exactly what Splunk did in Q3, delivering a 2.2% reduction in its total operating expenses.
Most of the cost reduction came from its research and development department, with marketing and administrative expenses holding mostly steady.
The equation is quite simple: More money coming in with less money going out equals a far healthier bottom-line result. Splunk went from a net loss of $334.2 million in the year-ago quarter to a net loss of just $32.6 million in the recent quarter.
It’s worth pointing out that Splunk has a rock-solid balance sheet with over $1.7 billion in cash, equivalents, and short-term investments. However, it burned a substantial amount of cash in the past, losing over $1.3 billion during fiscal 2022 alone, which really highlights the company’s progress since.
If its recent net loss becomes the norm, then Splunk will buy itself several years’ worth of runway to continue growing its business. If it manages to reach profitability in the coming quarters, that’s an even greater win for investors.
Wall Street is very bullish on Splunk stock
The Wall Street Journal tracks 40 analysts who cover Splunk stock, and 23 of them have given it the highest possible buy rating. Five are in the overweight (bullish) camp, while the remaining 12 are neutral.
Most notable is the fact that not a single analyst recommends selling.
Splunk stock currently trades at roughly $91, but the average of Wall Street’s price targets is $113.66, which implies an upside of 24.6%. One analyst is particularly bullish, betting it could soar by as much as 90% to $173 per share.
Splunk is a quintessential company of the future, and it’s now making all of the right financial moves to deliver positive earnings for investors. Its stock is down 59% from its all-time high, but if Splunk continues on its current trajectory, that discount is unlikely to last much longer. Given the consensus backing from Wall Street professionals, investors might want to buy in now.
— Anthony Di Pizio
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Source: The Motley Fool