I talk about the “pathway to profitability” a lot. I do so because I’m generally not a fan of stocks that don’t make money. If you want to bet on money losers, save it for the private markets where the scrutiny isn’t nearly as high.
As a result of my views, I have a hard time understanding Wayfair (NYSE:W), the Boston-based online seller of everything for your home. It loses a boatload each quarter, yet analysts eat it up. Why? Because it’s perhaps building a logistics powerhouse.
And then, you’ve got Splunk (NASDAQ:SPLK), a San Francisco-based tech platform that helps companies turn their data into business decisions — hopefully, profitable ones.
It too loses money on a GAAP basis, but from where I sit, Splunk stock is far more attractive. It’s got a much clearer pathway to profitability. Here’s why.
Splunk’s New Pricing
Data’s not an easy thing to price.
As reams of it flow in, it’s hard to know what it’s worth. Most of Splunk’s 18,000 customers pay an annual licensing fee based on a combination of the volume of data indexed each day and the volume of data stored. I’d suggest you go to its website or U.S. Securities and Exchange Commission Form 10-K to learn more about its pricing.
Suffice to say, if you’re familiar with business-to-business subscription models, you’ll be comfortable with Splunk’s. On Sept. 18, Splunk introduced advancements to its pricing model so that customers better understand what they’re paying for — and why. As I said, it’s hard to know when data is gold or just gold dust.
With its new pricing model, customers get to avail themselves of predictive pricing, infrastructure-based pricing and even rapid adoption packages for frequently used data.
I’m not going to pretend to know everything about Splunk’s pricing, nor its technology, but what it seems to be saying from the new model is that customers weren’t totally confident in the value of Splunk’s platform. I’m not suggesting its customers don’t love its Data-to-Everything Platform, because they do.
“Data is one of Nubank’s most valuable assets, it’s what makes us one of the fastest-growing financial technology companies in the world,” Nubank co-founder Cristina Junqueira said. “Splunk removes the complexity of data, so we can focus on delivering the best experience for our 12 million customers who want to take back control of their financial lives.”
Every business wants to know the cost of their decisions. Splunk moved to make its pricing more transparent so that its customers get better outcomes at a reasonable price.
To me, this suggests Splunk’s ready to take the next step in its growth. And as part of this growth process, deliver GAAP profitability for its shareholders.
Wayfair Stock vs. Splunk Stock
In the first six months of the year, Splunk had a non-GAAP profit of $49.8 million on $941.4 million in total revenue. In the first six months of Wayfair’s fiscal year, it had a non-GAAP loss of $272.2 million on $4.3 billion in revenue. On a GAAP basis, Splunk lost $256.3 million while Wayfair lost $382.3 million.
If you’re a Wayfair shareholder, you might take solace in the fact that Wayfair on a GAAP basis, loses 9 cents per dollar of sales compared to 27 cents for Splunk. This suggests the tech platform is hardly laying a clearer pathway to profitability.
However, on a non-GAAP basis, it’s obvious that the two companies are going in different directions.
In the first six months of the year, Splunk’s non-GAAP profit increased by 2,065% to $49.8 million from $2.3 million a year earlier. Meanwhile, Wayfair’s non-GAAP loss increased by 82% to $272.2 million from $149.2 million a year earlier.
As a tech company, it’s not unusual to have such big amounts set aside for stock-based compensation, which blur profitability and make it harder to know when it will generate GAAP-based profits. So, while comparing Splunk to Wayfair might not be an apples-to-apples comparison, it is meant to demonstrate that you always have options.
The second, more troubling aspect of Wayfair, is that its advertising spending to attract new customers continues to rise.
In the second quarter, Wayfair grew its active customers by 39.1% to 17.8 million. Therefore, based on $259.2 million in advertising in Q2 20219, it spent $14.56 in advertising per active customer. A year earlier, it spent $177.6 million on advertising or $13.88 for every one of its 12.8 million active customers.
The Bottom Line on Splunk Stock
Wayfair spent 4.9% more in the second quarter to attract an active customer than it did a year earlier. I don’t know about you, but Wayfair’s been an online site for eight years, so you would think the cost per active customer would be moving lower as its name became better known. But it’s not.
It is for this reason that I’m not sure Wayfair will ever make money. From where I sit, Splunk is the better investment of the two money-losing stocks.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.