Shares of Splunk (SPLK) have fallen some 27% and 32% over the past three months and six months, respectively. And if you’ve bought and only held the stock over the past nine months then you are down almost 20% on your investments. In all three time periods, Splunk has underperformed the broader S&P 500 index by some significant margins.
All told, the machine data analytics company has had a tough few quarters. But now could be an ideal time to buy the stock and bet on a recovery. Splunk will report fourth quarter fiscal 2020 earnings results Wednesday after the closing bell. Unlike previous quarters, expectations are more reasonable for the top and bottom line numbers the company might reveal. So, a revenue and profit beat, and perhaps upside guidance, is in order.
The pandemic has caused enterprises to rethink their security and cloud solutions. Splunk understands customer behavior and can assess online end-to-end business transactions. Its outlook and its billings forecast for 2021 will be the most closely-watched aspects of the report. The question remains, how will the stock — which is now attractively priced — react, given that investors have shifted their focus on the company’s valuation.
For the quarter that ended January, Wall Street expects the Splunk to earn 4 cents per share on revenue of $682.03 million. This compares to the year-ago quarter when earnings came to 96 cents per share on revenue of $791.18 million. For the full year, the company is projected to lose 91 cents per share, down from earnings of $1.88 per share a year ago, while revenue of $2.17 billion would declined 7.8% year over year.
With the company coming off a quarter during which revenue fell 11%, the management team on Wednesday will need to convince a skeptical market that Splunk, which enjoys a leading position in three focus areas, can return to growth much sooner than anticipated. One way to do this is by outlining the company’s total addressable market (TAM) which is poised to expand in the quarters and years ahead. Estimates suggests that the Splunk's TAM could grow 40% to close $114 billion in the next two years, compared to $81 billion in 2020.
Assuming this growth rate is achieved, not only does this make Splunk an attractive stock for long-term investors, the company is s poised to deliver double-digit growth over the coming years. What’s more, Splunk has established a strong partner base, which, includes the likes of Amazon (AMZN), Accenture (ACN), Google (GOOG , GOOGL) and Cisco (CSCO). These relationships will play a key role in helping Splunk separate its offerings from competitors such as Datadog (DDOG), Dynatrace (DT), among others.
Competition was a main factor In the third quarter as Q3 results fell short not only on the top and bottom lines, but also with annual recurring revenue. Total Q3 revenue was down 11% year over year to $558.57 million, missing consensus estimates by about $57.7 million. The Q3 adjusted loss was 7 cents per share, versus the expected gain of 8 cents. What’s more, adjusted operating margin turned negative 1.7%, missing the 3.2% the Street was looking for.
All in all, it wasn’t Splunk’s best quarter. But the company will look to bounce back on Wednesday by demonstrate why it is better-positioned to capitalize on the growing adoption of cloud, data analytics and its expanding addressable market.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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