This has been a good year so far for Big Data provider Splunk (NASDAQ:SPLK). Year to date, Splunk stock is up over 45%.
Thankfully for investors, the case for Splunk should just be getting brighter.
According to Dr. Carson Leung, the director of the Database & Data Mining Lab at the University of Manitoba:
“Embedded in [Big Data] is implicit, previously unknown, and potentially useful information and knowledge. However, these big data come with volumes beyond the ability of commonly-used software to capture, manage, and process within a tolerable elapsed time. Hence, new forms of information science and technology — such as big data analysis and mining — are needed to process and analyze these big data so [as to] enable enhanced decision making, insight, knowledge discovery, and process optimization”
In other words, data analytics is becoming increasingly important, especially amid the novel coronavirus. And Splunk is one of the biggest players in the space. Therefore, I’ll take a closer look at what market participants can expect from SPLK shares in the coming months.
Although there will likely be choppiness and some profit-taking in the short run, I believe Splunk stock belongs in long-term portfolios.
What About Second-Quarter Results?
California-based Splunk allows businesses to analyze and interact with machine-generated big data through a website-style interface. On Aug. 26, Splunk released mixed second-quarter results. Total revenues were $492 million, down 5% year-over-year.
But analysts were expecting $522.52 million.
Adjusted losses per share of 33 cents came in line with estimates. An operating loss of $239.5 million was 175.6% wider YOY.
Cloud revenue was $126 million, up 79% YOY. This metric was in line with the overall picture that Splunk’s customers are moving to the cloud, which is likely to become the growth driver in the years ahead. The company is currently transitioning to a subscription model which means recurring cash flows as opposed to upfront customer payments.
As a result, cloud annual recurring revenue (ARR) was $568 million, up 89% YOY. Splunk now has 396 customers with ARR greater than $1 million. Splunk’s client list is growing and now includes 92 companies on the Fortune 100 list. Some of its high-profile customers are Domino’s Pizza (NYSE:DPZ), Intel (NASDAQ:INTC), the University of San Francisco, U.S. Census Bureau and Zillow (NASDAQ:Z).
CEO Doug Merritt said, “I’m pleased to see the role Splunk’s Data-to-Everything platform has played in helping our customers drive meaningful insights as they advance into The Data Age to meet the challenges of 2020 and beyond. Splunk’s cloud business continues to accelerate, now representing more than half of our software bookings in the quarter — a major milestone in our cloud journey.”
Within the early part of the decade, the company is aiming to bring in over 50% of its revenue from cloud. Going forward, Wall Street will continue paying close attention to not only the top- and bottom-line numbers, but also to Splunk’s update regarding its enterprise customer additions.
What Could Derail Splunk Stock in the Short Term?
Over the past year, Splunk stock is up over 90%. Its 52-week range has been $93.92-$223.33. Importantly, shares have more than doubled off their mid-March lows.
However, following the release of the Q2 numbers, some profit-taking has kicked in. And this down move is consistent with the short-term technical picture of Splunk stock. In the coming days, a move toward the $200 level or even below is possible. Such a level would offer a good entry point.
Do you already own SPLK shares? Then you might want to stay the course and hold onto your position. That said, if you are worried about further profit-taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3% to 5% below the current price point to protect the profits you’ve already made from Splunk stock.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, like an Oct. 16 expiry. Such a covered call position would offer you some downside protection. You would also be able to participate in a potential up move.
Finally, SPLK stock’s beta value is about 1.55, which means it is more volatile than the broader market. Therefore, the shares will react fast when broader markets move in either direction. So, short-term traders should proceed with caution.
The Bottom Line
Big data typically describe the rapid increase in the amount and variety of information available in almost every aspect of our lives as well as our increasing ability to analyze and interpret the data. As a result, Splunk stock has significantly outperformed the broader market so far in 2020.
Fundamental catalysts will likely drive the shares even higher in the quarters to come. Analysts expect to see substantial gains for data analytics and cloud management software. Firms that use the software-as-a-service model to generate recurring income will continue to fare well.
So, it is safe to say that Splunk stock belongs in a long-term portfolio. However, investors should also remember that a stock’s price increase is never a straight line up.
Investors should be ready to embrace more volatility in the coming weeks. Yet, those with a longer-term time horizon may consider buying into any potential weakness in Splunk stock in the coming weeks. They will likely participate in the company’s march to potentially becoming a $100-billion business during the decade.
On the date of publication, Tezcan Gecgil did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.