Big data analytics platform Splunk (NASDAQ:SPLK) is set to report third-quarter earnings after the bell Nov. 21. For a variety of reasons including sustained big data market tailwinds, recovering business confidence and Splunk’s new Data-to-Everything model, I think those numbers will be pretty good.
Also for a variety of reasons — including that shares appear fundamentally undervalued here and haven’t gone anywhere since the last earnings report — I think those good numbers will spark a nice post-earnings rally in SPLK stock toward $140.
The investment implication? Buy SPLK stock ahead of earnings.
Here’s a deeper look.
Splunk Earnings Should Be Good
Splunk’s third-quarter earnings should be good for a variety reasons.
First, big data market tailwinds remain alive and well, and that should provide nice support for Splunk’s business. Splunk is in the game of turning data into actionable insights. Further, it is the best in the game at doing this today. Thus, so long as demand for turning data into insights remains robust, Splunk’s numbers should remain good.
At present, it appears that demand for doing this is as robust as ever. Simply consider that Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) acquired Fitbit (NYSE:FIT) recently almost purely for data, or that tennis players are using big data to prep for matches or that the real estate industry is similarly starting to leverage big data to become more efficient.
Second, business sentiment is recovering, and this recovery should provide a boost for Splunk. In a nutshell, Splunk sells big data solutions to businesses. Thus, when business confidence is low, Splunk’s customers aren’t spending as much. When business confidence is high, Splunk’s customers are spending a lot.
Right now, we appear to be transitioning from an era of low confidence to high confidence, thanks to easing U.S.-China trade tensions and an improving global economic outlook. This transition should provide healthy tailwinds for Splunk both today, and for the foreseeable future.
Third, Splunk’s recently launched Data-to-Everything model is likely seeing healthy early adoption, mostly because it is the first platform of its kind serving a valuable purpose and equipped with a unique and personalized pricing model.
Splunk Stock Can Rally
As investors know, good earnings don’t necessarily equal a post-earnings rally. But, in SPLK’s case, good third-quarter numbers should lead to a nice rally in SPLK stock.
SPLK stock hasn’t gone anywhere since its last earnings report. Meanwhile, the S&P 500 has roared to all-time highs. This relative underperformance means that sentiment isn’t overly bullish on SPLK stock. Instead, it’s rather bearish, and this means there is plenty of dry powder for sentiment to improve and drive a nice post-earnings rally in the event that Splunk’s numbers are good.
Also of note, SPLK stock appears fundamentally undervalued heading into the print. You can go through my numbers in-depth here. But, the big idea is that thanks to the reality that data is the future of everything and Splunk is at the frontier of the business data analytics movement, Splunk reasonably projects as a 20%-plus revenue grower over the next several years. Further, this is a high gross margin business with plenty of room for positive operating leverage, so profit margins have visible runway to increase by a considerable amount.
Modeling that out, Splunk has a realistic opportunity to hit $6 in earnings per share by fiscal 2025. Based on a 10% discount rate and a forward price-to-earnings multiple of 35, which is the average for application software companies, that equates to a fiscal 2020 price target for SPLK stock of over $140.
Bottom Line on SPLK Stock
SPLK stock is a long-term winner that is going through some near-term turbulence. A strong third-quarter earnings report which confirms that the company’s new Data-to-Everything platform is gaining traction could put an end to this era of near-term turbulence.
If it does, then SPLK stock has runway to $140-plus prices in the wake of its third-quarter earnings report.
As of this writing, Luke Lango was long SPLK.
