Is Splunk’s Rally a Glimmer of Hope or a Mirage?

Adrenaline junkies of the investing world, brace yourselves! Splunk (NASDAQ:SPLK), the company that once led the frontier of searchable unstructured business data, is back in the spotlight.

A long-ignored wallflower in the dance of cloud analytics, Splunk is now drawing attention with its recent stock rally. The company’s free cash flow has solidified and GAAP net income is on the cusp of breaking even.

But wait, before getting caught up in the recent stock pop, let’s dissect whether this resurgence is a new dawn or just a fleeting twilight for Splunk.

Revenue Soared, But Set To Slow

In times of economic downturn, metrics like free cash flow and GAAP net income become the crux of investor sentiment. Splunk has done a commendable job in these departments, swaying investor sentiment and sparking the recent rally.

However, the enthusiasm must be measured against the broader context. Splunk’s annualized recurring revenue (ARR) rose to almost $3.9 billion, a commendable percentage uptick year-over-year.

Yet, when you look at the projected ARR for the end of the fiscal year, it’s estimated to inch up by only 3% to just under $4 billion. These figures indicate a more subdued outlook, and suggest the rally might be more of a sigh of relief than a genuine sign of turnaround.

Transition To Cloud Is a Battle To Be Won

Splunk’s tardiness in fully transitioning to cloud-based software and modern pricing models is a chink in its armor. This hesitation has created an accounting quagmire, affecting profitability and pitting it against nimble competitors like Datadog and Dynatrace.

While the company’s cloud revenue grew by almost 30% year-over-year to over $440 million, it begs the question—has Splunk been too slow to adapt?

Revenue growth has been slackening, and with tightened budgets across the board, Splunk’s “growth is resilient but how resilient?” becomes the million-dollar question.

Can Splunk Fend Off Datadog?

Splunk is busy playing catch-up to close the technology gap with industry leaders. But how far can it go? While the company is making strides in unifying its diverse offerings, competitors like Datadog have already set high bars.

They offer holistic solutions, seamlessly integrating tasks under one umbrella—a feature conspicuously lacking in Splunk’s portfolio.

The company’s existing and prospective clients are looking for precisely these kinds of end-to-end solutions, and unless Splunk can deliver on that front, it’s bound to remain a step behind.

Is Splunk Fairly Valued? 

Analysts rate the fair value of Splunk at $126 per share, which is close to the present value. A discounted cash flow forecast offers a slightly more optimistic viewpoint and places fair value at $132 per share. That would suggest as much as 8% upside from current levels. As such, Splunk appears marginally undervalued, but is not a compelling buy.

Wrap-Up

Splunk’s recent rally has excited many investors, but as the dust settles, the hard data suggests a less-than-rosy picture.

The company’s financials are gradually stabilizing, yet it’s marred by slow cloud adoption, stalling revenue growth, and intensifying competition.

If you’re considering pulling the trigger on Splunk, it might be prudent to take a more calculated risk. There are arguably better picks out there in the cloud universe that offer not just short-term thrills but long-term gains.

After all, in the game of investing, it’s not just about the sprint; it’s a marathon. So, choose your runners wisely.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.