This Tech Stock Has Been Delivering Big Returns
Today’s chart highlights one of the most overlooked tech stocks on the market: Splunk Inc (NASDAQ:SPLK).
Headquartered in San Francisco, Splunk is a data analytics company. Its “Data-to-Everything” platform helps businesses investigate, monitor, analyze, and act on data. Because Splunk’s services are geared to businesses, most consumers have never heard of the company.
However, the few people who were informed enough to load up on Splunk stock at the right time have made some serious profits. Year-to-date, the company’s share price is up more than 40%. Over the past three years, the stock has more than doubled.
As you’d expect from a soaring tech stock, one of the main reasons behind the SPLK stock rally was the sheer growth of its business.
In the third quarter of Splunk’s fiscal-year 2020, which ended October 31, 2019, the company generated $626.0 million of revenue, representing a 30% increase year-over-year. Revenue earned from software, the biggest segment of the company, rose 40% from a year ago to $454.0 million. (Source: “Splunk Inc. Announces Fiscal Third Quarter 2020 Financial Results,” Splunk Inc, November 21, 2019.)
“Splunk continues to show the world how our Data-to-Everything Platform is uniquely positioned to bring data to every question, decision and action,” said the company’s President and Chief Executive Officer Doug Merritt.
“Whether through our groundbreaking innovations like Splunk Data Fabric Search and Splunk Data Stream Processor or aggressive acquisition strategy, Splunk is transforming the way our customers around the world turn data into doing,” he continued.
The business is also non-generally accepted accounting principles (GAAP) profitable. For the third fiscal quarter, Splunk Inc earned a non-GAAP net income of $0.58 per share.
Notably, both top- and bottom-line numbers beat Wall Street’s expectations. On average, analysts expected the company to report adjusted earnings of $0.54 per share on $604.6 million of revenue.
Considering that Splunk stock has been soaring, expectations were already pretty high. Yet, in the past 12 months, the company has beaten analysts’ earnings-per-share estimates in all four quarters. (Source: “Splunk Inc. (SPLK),” Yahoo! Finance, last accessed November 26, 2019.)
Earnings beats provided a pretty good reason for investors to continue liking SPLK stock. In the trading session following the company’s latest earnings release, Splunk shares surged 10.8%.
Other than growth in headline numbers, there is another reason why Splunk stock deserves investor attention: the company’s business is recurring.
Instead of making one-time sales, the company earns revenue from active subscription, term license, and maintenance contracts. In its most recent fiscal quarter, Splunk’s average contract duration was 36.3 months. (Source: “Investor Presentation and KPIs Third Quarter FY20,” Splunk Inc, last accessed November 26, 2019.)
The recurring nature of the company’s sales allows it to generate predictable financials.
The chart below shows Splunk’s total annualized recurring revenue at the end of each of the past five fiscal quarters.
Total Annual Recurring Revenue of Splunk Inc (Millions)
And thanks to an expanding customer base, Splunk’s business is only going to get bigger. In its third fiscal quarter, the company added 440 new enterprise customers. (Source: Splunk Inc, November 21, 2019, op. cit.)
Better yet, its customers have been spending more. In Splunk’s fiscal-year 2017, it had 167 orders that were greater than $1.0 million. In the company’s fiscal-year 2019, the number had gone up to 394. (Source: “Investor Presentation and KPIs Third Quarter FY20,” Splunk Inc, op. cit.)
And while Splunk is a U.S. company, it has managed to expand internationally. In the previous fiscal year, 29% of its revenue was earned from customers outside the United States.
Seeing the company’s solid performance so far, management has raised their guidance.
For full-year fiscal 2020, which will end on January 31 of that year, management expects Splunk Inc to generate almost $2.4 billion of total revenue while achieving a non-GAAP operating margin of 14%. (Source: Splunk Inc, November 21, 2019, op. cit.)
This would represent a substantial year-over-year improvement because, in Splunk’s fiscal-year 2019, it generated $1.8 billion of total revenue and its non-GAAP operating margin was 12.7%. (Source: “Investor Presentation and KPIs Third Quarter FY20,” Splunk Inc, op. cit.)
And that’s not all. Other than having a booming business, SPLK stock could also benefit from being a potential acquisition target.
You see, with a strong presence in the data analytics business, Splunk looks very attractive to companies that are eyeing the big data market.
When one analyst recently said that “Splunk is exactly the kind of company that could become an acquisition target for a larger enterprise software firm,” the stock surged another five percent. (Source: “Splunk Stock Climbs After Argus Report Sparks Takeover Talk,” The Street, November 25, 2019.)
Spunk Inc (NASDAQ:SPLK) Stock Chart
Chart courtesy of StockCharts.com
For investors looking to capitalize on the big data analytics industry, Splunk Inc should be one of the top names to consider.