Shares of big-data analytics company Splunk (NASDAQ:SPLK) have been red-hot for a long time, and with good reason. This company is at the heart of the Big Data Economy, developing solutions which help enterprises turn their abundant data into actionable insights.
The Big Data Economy has mushroomed rapidly over the past several years, and as it has, more and more enterprises have turned to Splunk to help them succeed in this economy.
As all that has happened, Splunk’s revenues have surged higher, jumping 300% from 2015 to 2019, as have its profits ( its operating profits are up nearly 2,000% over that same stretch). This robust revenue and profit growth has translated into huge gains for SPLK stock. Over the past five years, Splunk stock has surged about 175%.
In other words, Splunk stock has been a long-term winner.
But this long-term winner hit a road bump recently. Splunk reported beat-and-raise second-quarter numbers recently that, ostensibly, were pretty good. But they weren’t clean beat-and-raise results. Specifically, SPLK announced a sizable acquisition that will be partially funded through Splunk stock, so investors were concerned about that dilution. Also, SPLK cut its cash-flow guidance as the company’s pivot into a subscription-based business is creating a near-term drag on its cash flows.
Investors weren’t too pleased about the Q2 numbers. Splunk stock dropped sharply in response to the results and presently trades 15% below its recent highs.
At these levels, SPLK, a continuous-growth company, is a great stock to buy. Here’s why.
The Fundamentals Remain Favorable
The first main reason SPLK is a great stock to buy on weakness is because Splunk stock remains supported by highly favorable, long-term growth fundamentals.
In order to understand the long-term bull thesis on SPLK stock, it’s first necessary to understand just how large the Data Economy will become. For all intents and purposes, data is the most valuable asset in the world. With data, companies can do a great number of things, including improve customer conversion rates, target new demographics, and create new and better products.
The world is awash in data, and the volume of data is growing exponentially as more and more consumers leave bigger and bigger digital footprints. Thus, companies everywhere have a ton of data at their finger tips. But turning that data into actionable insights is a tall order.
Splunk helps companies turn all this raw and messy machine data into clear and actionable insights. Companies don’t just want to do that. They need to do that because if their competitors are gaining more and better insights from data, then they’ll lose customers. It’s that simple.
Thus, competitive dynamics ensure that pretty much every company is going to start doing everything they can to gather, analyze, and interpret data.
Does that mean every company in the world will become a customer of SPLK one day? No. There are many big-data solutions, and Splunk is just one of them. But Splunk arguably has the best data-analysis solution, so as the Data Economy grows over the next several years, so will Splunk. And as that happens, Splunk stock will climb, making Splunk a good stock to buy.
I think Splunk’s top line will climb 20%-plus annually for a long time. Moreover, its gross margins should reach nearly 90%, and its operating-expenditure rate should naturally fall as its revenue increases rapidly. The end result of that is huge profits and a materially higher Splunk stock price in the long-run.
Splunk Stock Looks Good
The second reason Splunk stock is a good name to buy is that it is appealing to investors in the current macro environment. That characteristic will help boost Splunk stock for the foreseeable future.
In the current high-risk, low-yield world, investors can get good returns from growth stocks supported by non-cyclical tailwinds which won’t be interrupted by a trade war or a slowing economy. SPLK is in that category.
As a result, investors will continue to be attracted to Splunk stock as long as the current macro trends persist. That continued attraction should keep SPLK stock on a healthy uptrend for the foreseeable future.
The Technicals of SPLK Stock Look Good
The third reason Splunk stock is a good name to buy is that – despite its recent decline – the stock is still supported by favorable technicals which imply that its recent weakness is a natural hiccup in an otherwise strong uptrend.
Click to Enlarge
As you can see from the adjacent chart, Splunk stock put in a bottom in late 2018. Ever since then, SPLK stock has been on a steady and healthy uptrend, enabling the shares to form a strong support line.
SPLK stock has tested and held that support line three times before. Each time, the Relative Strength Index on SPLK stock was plunging into oversold territory. And each time, SPLK stock proceeded to bounce sharply over the subsequent weeks and months. Consequently, the shares maintained their multi-quarter uptrend.
Right now, SPLK stock is testing that support line, with the RSI plunging towards oversold territory. It looks like the stock wants to hold this support line yet again. If it does, that is confirmation that Splunk stock remains on a healthy, multi-quarter uptrend which should persist for the foreseeable future.
The Bottom Line on SPLK Stock
Splunk stock is a long-term winner, supported by non-cyclical tailwinds in the Data Economy. The near- term weakness of Splunk stock is an opportunity to buy shares of this long-term winner. Its fundamentals remain favorable and it looks strong, creating robust investor demand. And the technicals of SPLK stock indicate the shares will rebound over the next few months.
As a result, I’m buying SPLK stock. The shares can rise in the near-term and over the long-term.
As of this writing, Luke Lango was long SPLK.