Splunk Stock: Growth and Value Play?

Splunk (NASDAQ:SPLK) is a big-data analytics software play that's fallen drastically out of favor in recent years.

It went through a painful revenue recognition transition, making it harder for investors and analysts to interpret how the firm has been doing.

Undoubtedly, the company's transition to a subscription-based cloud data monitoring model has made Splunk's quarterly results somewhat weaker than they actually were. Management did make this clear to investors. Yet, Splunk remains something of a question mark as far as cloud companies go.

After yet another rocky year for Splunk stock, and a valuation that looks ever so tempting, I remain neutral on the name. (See SPLK stock charts on TipRanks)

A lot is going on behind the scenes at Spunk. While the stock could prove severely undervalued here, it might be best to take a wait-and-see approach, despite the stock's large number of Buy ratings from analysts.

A Solid Q2 for Splunk

In late August, Splunk reported a mild earnings beat, with an EPS loss of $0.62, beating the consensus estimate by seven cents. Over the past year, it's been hit or miss for Splunk with regard to quarterly earnings. So, this latest round of results was definitely refreshing for Spunk investors who've stayed patient.

For the second quarter, revenue rose 23.2% year-over-year to $605.7 million. Respectable growth for a firm that's continuing to move forward with its transition to the cloud.

While the worst of the transition is likely in the rear-view mirror, investors should expect continued volatility as the firm looks to beef up its ARR (Average Recurring Revenues). Splunk's clients have shown a willingness to stick around, which bodes well for ARR growth in a competitive environment, as the firm looks to improve and expand its suite of offerings.

Still, with uncertainty as to when the company will move into sustained profitability, the stock's rich multiple (shares currently trade at 10.2 times sales), a lack of share price momentum, and significant sales and marketing costs, it might be best to wait on the sidelines for now.

Wall Street's Take

According to TipRanks’ analyst rating consensus, SPLK stock comes in as a Moderate Buy. Out of 22 analyst ratings, there are 16 Buy recommendations, and six Hold recommendations.

The average SPLK price target is $181. Analyst price targets range from a low of $153 per share, to a high of $210 per share.

Bottom Line

Splunk's offering has shown signs of being sticky, and shares may very well march much higher on the other side of the company's cloud transition.

Regardless, the name isn't very timely at this juncture, as the transition could continue to make the numbers look weaker over the time being.

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If you're keen on investing in Splunk at this time, you won't be alone. A majority of analysts are bullish on the name. Many are likely looking past the tough transition, to a potentially smoother road ahead.

Disclosure: Joey Frenette doesn’t own shares of any company mentioned at the time of publication.

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