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Splunk Stock s a Buy Says Analyst Here s Why

Splunk's attractive valuation isn't the only reason Wall Street is bullish toward the software stock. The pros like its solid business model too. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Will Ashworth published 13 October 2022 Splunk (SPLK (opens in new tab), $68.01) recently got a Buy rating from CFRA Research analyst John Freeman, who initiated coverage of the large-cap enterprise software stock. "SPLK continues to hold strong, tough-to-replicate advantages in data processing and analysis of real-time streaming data, the volume and value of which will only continue to expand at historical rates with more new use cases to drive demand," Freeman writes in a note to clients.

Why Experts Think Q3 Earnings Could Be Awful And Freeman's not alone in his outlook. Analysts generally like Splunk. According to S&P Global Market Intelligence, the 39 that cover Splunk stock give it a consensus Buy rating and an average price target of $129.80, representing implied upside of almost 91%.

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Profit and prosper with the best of Kiplinger's expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger's expert advice - straight to your e-mail. Sign up One of the main points of CFRA's bullish thesis is SPLK's valuation. CFRA believes SPLK is undervalued based on its current business successes. According to Freeman's research report, Splunk trades at 4.0 times its forward sales – well below its five-year mean of 8.5 times forward sales. In addition, its price-to-sales ratio sits at a five-year low.

3 More Reasons to Like Splunk Stock

In addition to an attractive valuation, Freeman highlights three positives that stand out about Splunk's business in fiscal 2023 (the company's fiscal year begins in April). First, its data-processing platform is challenging to replicate, providing Splunk with a wide moat against potential competitors. Secondly, it has a significant market share in several markets, including the top position in the IT Operations for Health and Performance Analysis (HPA) segment at 8.2% in calendar year 2021, according to research firm Gartner – a 19.3% gain over 2020. Lastly, its transition to a cloud-based recurring revenue business model continues to gain traction.

Can Stocks Picked by Artificial Intelligence Beat the Market? 3 Stocks to Watch The company's most recent Q2 2023 earnings report saw cloud revenue grow by 59% year-over-year to $346 million, or 43.3% of its overall revenue. That's up from 35.9% of overall revenue in Q2 2022. Meanwhile, Splunk's total annual recurring revenue (ARR) is expected to be $3.65 billion in 2023, with its cloud ARR accounting for 49.3% of its total ARR. That's 640 basis points higher than in 2022 (a basis point is 1/100th of a percentage point). The company continues to maintain loyal cloud-based customers. Its cloud dollar-based net retention rate (Cloud DBNRR) in its fiscal second quarter was 129%. This means it's generating 29% more revenue in a given year from its existing customers. While that's down from 130% seen in Q1 2023, it remains above 120%, which is considered excellent by industry standards. CFRA's three-year revenue CAGR (compound annual growth rate) forecast for Splunk is 23%. That's based on the company's transition to a cloud-based business model, continuing unabated for three years. It began its cloud-based subscription model in 2020. In its first year of transitioning, overall revenue growth fell to 30% from 42% in 2019 as traditional customers disappeared, replaced by cloud-based ones. By 2021, overall revenue fell by 6% as more of its traditional customers stopped doing business with the company.

Splunk Has a Competitive Advantage

But over the past two years, its overall revenue growth has accelerated thanks to its Cloud ARR. That's expected to continue, Freeman says. The analyst believes that Splunk has a significant competitive advantage against many of its peers.

Should You Buy the Mobileye Self-Driving Car IPO? "[Splunk's] Patented underlying software engine that can truly process streaming data in real time. While other real-time data processing methods are possible to construct without violating SPLK's patents, SPLK's technique works particularly well and is proven," Freeman writes in his report. As a result of this competitive advance, CFRA sees hundreds of new use cases being developed that combine Splunk's data processing engine with machine learning apps, providing the company with near-term opportunities in the hundreds of millions. Long-term, these use cases could be worth billions to the company. While business continues to look very bright for Splunk, Freeman does warn that it doesn't expect its cloud business to account for 50% of revenue until Q1 2024, three quarters from now. With net debt of $2.4 billion, or 21% of its market cap, there is little room for its cloud business's growth to slow. Despite these risks, CFRA still believes Splunk is one of the better large-cap enterprise software stocks heading into 2023. That's why it rates SPLK a Buy.

10 Electrifying EV Stocks Worth Watching Explore More Splunk (SPLK) Will AshworthContributing Writer, Kiplinger.comWill has written professionally for investment and finance publications in both the U.S. and Canada since 2004. A native of Toronto, Canada, his sole objective is to help people become better and more informed investors. Fascinated by how companies make money, he's a keen student of business history. Married and now living in Halifax, Nova Scotia, he's also got an interest in equity and debt crowdfunding. Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 You might also like 5 Big Data Stocks to Buy for Big Long-Term Growth tech stocks More data, more problems ... but also more opportunity for the expanding universe of big data stocks helping companies sift through the noise. By Tom Taulli • Published 2 May 22 Stock Market Today: Stocks Slip as Russia-Ukraine Tensions Build Stock Market Today Oil prices zipped higher Monday as the U.S. ordered Kyiv embassy closed, but energy stocks and other cyclicals finished in the red. By Kyle Woodley • Published 14 February 22 The Top Artificial Intelligence (AI) ETFs ETFs Artificial intelligence could define the next decade. These five AI ETFs provide investors with well-rounded exposure as this technology comes into its own. By Kyle Woodley • Published 23 July 20 View More ▸ kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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