During the “tech wreck” of late February and early March, no tech stock was spared. Throughout this meltdown, not even the technology firms reporting strong earnings reports were spared amid the meltdown, including data analytics provider Splunk (NASDAQ:SPLK), which reported very healthy fourth-quarter numbers in early March. SPLK stock has been on a downward spiral ever since, but it now looks significantly undervalued and could rebound soon, and by a lot.
Splunk is a very solid company, providing industry-leading data analytics tools with robust and rapidly growing demand.
The company’s growth trajectory is set to meaningfully improve in 2021/22 as economic normalization sparks a big recovery in enterprise spending. And SPLK stock is now significantly undervalued amid a plunge that is largely nonsensical.
So, buy the dip in SPLK stock before it comes roaring back.
Here’s a deeper look:
SPLK Stock: A Great Company
The long-term bull thesis on SPLK stock is compelling for one very simple reason: Splunk is a great company with a ton of potential.
We are sprinting into the Intelligence Economy — a new era wherein companies and persons become smarter with the help of data, AI and algorithms. This future is inevitable, because (somewhat obviously) AI-powered and data-driven decision making leads to better outcomes. A 2020 Forrester Consulting Survey found that data-driven organizations are 58% more likely to beat revenue goals than their non-data counterparts.
By consequence, the Intelligence Economy will one day be ubiquitous. Yet, only 31% of companies today consider themselves data-driven, while 92% of companies are increasing their pace of investment in AI and Big Data.
Thus, the stage is set for explosive growth in the Intelligence Economy over the next 5 to 10 years.
Splunk is at the epicenter of this revolution.
Through its Data-to-Everything platform, Splunk offers various industry-leading services and tools which enable enterprises to seamlessly capture, aggregate, monitor, and analyze data from various sources, with an endless number of end-applications, including security, consumer experience, product development, marketing, etc.
Gradually, Splunk’s big data tools are morphing into a “must-have” for enterprises in today’s increasingly data-driven world, mostly because any enterprises that aren’t adopting data-driven decision making software, are getting left in the dust.
So, over the next several years, demand for Splunk’s big data services will broaden out to encompass almost every enterprise out there. At the same time, current customers will up their spend on Splunk, because the volume of data these customers are generating is growing exponentially with the rapid proliferation of data-collecting smart devices and apps.
Net net, over the next five to ten years, Splunk will turn into a necessary big data analytics tool for enterprises, on which a ton of enterprises of all shapes and sizes will spend a ton of money to extract all the information they can from all the data they have.
Ultimately, these secular trends imply that Splunk will stay on a huge growth trajectory for a lot longer — which, of course, is great news for SPLK stock.
Big Turnaround in 2021/22
Now, Splunk did get hit hard amid the Covid-19 pandemic.
Before the pandemic, this was a 30%-plus revenue growth company with rapidly expanding gross and operating margins. Now, it’s a negative revenue growth company with falling gross and operating margins.
That’s because business slowed during the pandemic, so companies leaned up their budgets, and enterprise spending on things like data analytics fell off a cliff.
But the economy is normalizing. Business is coming back. Companies are re-upping their budgets. Enterprise spending is recovering. Data analytics spend is rebounding.
Look no further than Splunk’s recently reported fourth quarter numbers for proof of this. In the quarter, both revenue declines and margin compression significantly moderated. Next quarter, Splunk is guiding for revenue growth to jump back into positive territory.
This recovery trend will persist.
As economic activity and consumer and enterprise behavior normalize in 2021/22, enterprise spending on data analytics software and tools will meaningfully accelerate. Splunk will return to being a 30%-plus revenue growth company with rapidly expanding gross and operating margins. And SPLK stock will rise back from the dead.
Splunk Stock Is Undervalued
Our numbers suggest that SPLK stock is significantly undervalued today.
Globally, the Big Data market is expected to grow at a 10%-plus clip over the next decade. Splunk will leverage its inherent data advantages (which allow for the creation of better data-driven predictive models) to gain share in this market over time. The company’s revenue growth rates will likely hover in the 15%-plus range for the foreseeable future.
Profit margins will improve with scale since the company is transitioning to a highly scalable, subscription-based cloud business model. Big profit margin expansion will add significant earnings growth firepower. That’s why we see Splunk’s earnings growing at a ~20% annualized clip over the next decade.
Plugging those assumptions into our valuation models, we output a 2021 price target for SPLK stock of over $200.
That represents 50% upside from current levels.
Bottom Line on SPLK Stock
The tech sector meltdown has created multiple golden buying opportunities. SPLK stock is one such opportunity.
But it’s not the best opportunity.
Instead, the best opportunity is in a company that reminds me of a young Amazon (NASDAQ:AMZN). Indeed, I think buying this stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
Which stock am I talking about?
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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