Splunk Stock: Starting to Get Interesting (NASDAQ:SPLK)

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investment thesis

If you are an investor in 2022, you have probably seen your portfolio drop drastically since the beginning of the year. All sectors, all companies, especially technology stocks, have lost a significant portion of their market capitalization and Splunk (NASDAQ:SPLK) is not an exception to the rule. The company’s share price has dropped nearly 30% YTD and is only continuing to drop. This means one of two things: either the company has reached a price where it becomes a value play, or it was priced so high that it has to go lower to be a good deal. Read on to find out what it is.

How does Splunk make money?

Splunk (<a src=


Splunk is a tool that finds and indexes log files and helps companies extract insights from data. Splunk also uses indexes to store data, eliminating the need for a separate database, which is one of its main advantages.

Splunk generates income in four (4) ways:

1. cloud services

Without acquiring ownership of the program, cloud services allow customers to use the hosted software for the term of the agreement. The customer can collect, monitor, search, report and analyze all current and historical machine data using the Splunk cloud platform. The company makes money from this service by charging its customers a subscription fee.

2. License

When control of the software is transferred, the cost of the license is recognized. License sales to new customers, as well as additional license sales to existing customers, including temporary license renewals, result in the recognition of license revenue.

3. maintenance income

A temporary license comes with maintenance included during the license period when purchased by a customer. On the other hand, a customer who purchases a perpetual license also pays a portion of the license fee for one year’s worth of maintenance.

Four. Income from professional services and training

The professional services offered by Splunk are intended to help customers use the software in extremely challenging operating environments. Fees for instruction and professional services are recorded as income when they are rendered or accrued over the term of the subscription.

Growing company in a growing market

For creative companies, cloud computing is a wise decision. Almost everyone is aware that cloud computing is a trend in the IT sector that cannot be stopped.

Splunk Revenue Growth

Splunk IR

At a Compound Annual Growth Rate (CAGR) of 16.3% over the forecast period, the size of cloud computing around the world The market is anticipated to grow from $445.3 billion in 2021 to $947.3 billion by 2026. Thus, if the company only maintained its current market share, it would also grow its gross revenue by 16.3% per year. However, analysts estimate that Splunk’s revenue will grow around 20% per year for the next 4 years. This suggests that as time goes by, the company will also increase its market share and, as a result, outperform its peers in terms of revenue growth rate.

Not profitable yet



Splunk Net Income


To this day, the company has never made a dollar in profit since it launched its IPO in 2012. Many investors may see this as a warning sign because, as we all know, a company is useless regardless of how much revenue it generates if somehow does not translate into profit. However, according to analysts, this year Splunk will experience its first year of profitability, and then its EPS will continue to rise rapidly.

This should be quite reassuring to the company’s shareholders, as once the business breaks even, not only will it have shown its investors that it can be a profitable business, but it also won’t have to dilute its shareholders to raise funds, as it will be able to support itself.

Net retention rate

Splunk Net Retention Rate

Splunk IR

The percentage of recurring revenue that is retained from current customers for a given period of time is known as Net Revenue Retention (NRR).

The fact that the business has such a high NRR of 129% implies that the business is good at keeping its current customer base and generating new revenue from those same customers. This is just evidence of how high quality of service Splunk offers, as it not only sustains its customers but also gets them to spend more and more money on its platform.


Splunk Rating


Splunk scores pretty poorly on the rating model. This is mainly due to the fact that the company is not yet profitable and therefore ratios such as EV/EBIT (FWD) and P/E Non-GAAP (FWD) are much higher than those of its peers. However, I don’t think we should criticize the company based on their earnings, but rather based on their P/S and the future this company has. Splunk’s current P/S ratio is 4.33. Although the company’s P/S ratio is a bit higher than its peers, you should be willing to pay a small premium for a company that is poised to outperform them in terms of top-tier revenue. Also, let’s not forget that a P/S ratio of 4.33 is still low for a SaaS company.

Valuation Forecast

Splunk fundamental analysis

Author’s calculations

Based on analyst forecasts, I predicted a revenue CAGR of 18.8% for the next 6 years. This brings the company to almost $7.4 billion in annual revenue by 2028. Going forward, I also projected a 25% FCF margin. As a SaaS company, by the time Splunk reaches its maturity stage, it should have a high margin; most companies in the same industry have FCF margins in excess of 30%, so I think 25% is definitely achievable. Lastly, just to be a bit conservative, I assumed a P/FCF of 18, which is even lower than the average P/FCF of the company’s peers, even though you get a faster growing company.

Assuming all of the above comes true, in 6 years you will end up with a stock worth $167.49. This valuation implies an annualized ROI of 10.5% over the next 6 years, which is neither great nor bad for your money.



The cloud industry has been quite hot lately and therefore many companies are trying to take a piece of the pie. I don’t think the company is in danger of going out of business in the next few years, but I do think it will have to find a way to differentiate itself from its competitors and that as competition increases, gross and profit margins are going to decrease. be reduced, leaving less money for the company to reinvest in itself and grow even more. This could lead to a slowdown in the growth rate of the business, which would drive down the share price.

Dilution and Profitability

The company is yet to turn a profit and while analysts expect it to be profitable this year, no one can be sure. With that in mind, I wouldn’t be surprised if the company’s management continued to dilute its shareholders, giving them a smaller part of the company, to raise capital and finance their expenses.


Splunk is trading at about 4.3 times sales right now. This seems to be a very fair price given the huge growth prospects. However, we must not forget the risks involved in buying the stock and mainly the fact that it will cost you to differentiate yourself from the competition. All things considered, at these prices, I rate Splunk a HOLD.

I’ll keep a close eye on this one, and if it gets cheaper I might start a position there.

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