Will Splunk’s Earnings Report Give the Tech Company a Boost?

The Splunk [SPLK] share price had a successful 2020, soaring 114.8% from $102.14 on 3 April 2020 to $219.46 on 22 October. It was driven by businesses looking for Splunk to collect and analyse their website, network and mobile big data to boost cyber security, improve their IT infrastructure and ramp up their customer experience during COVID-19.

The Splunk share price however fell back to $161.60 at the close on 6 January and $111.98 at the close on 3 June.

The drop was caused by disappointing revenue numbers with an 11% year-over-year fall to $559m as corporates looked twice at their tech budgets and Splunk’s upfront multi-year, perpetual licenses. The company’s transition from fixed contracts to a pay-as-you-go cloud-based model also weighed on revenues. Third-quarter cloud revenues climbed 80% to $145m, but these are smaller customer payments made annually on subscription.

Splunk’s chief technical officer and senior vice president Tim Tully quit in April and competition increased from companies like Datadog [DDOG] and Dynatrace [DT].

Splunk share price has suffered in line with other tech stocks because interest rates and inflation seem to be rising increasing their borrowing rates and adding economic pressure on future sales. Splunk is particularly vulnerable because it is still loss-making.

The Splunk share price has rallied recently, hitting $144.33 at the close on 20 August helped by a recovery in revenues in its first-quarter results in May.

Flying high — but at what cost?

Splunk is a high-risk investment because it is already highly valued at $23.65bn on the back of 2021 annual revenue of $2.23bn and an operating loss of 780m.

Another key risk for the Splunk share price is potentially reduced enterprise spending among SMEs and sectors hit by the pandemic such as aviation or travel and leisure.

Splunk reports its second quarter earnings on 25 August.

Splunk’s share price: a buy in the cloud mix?

Bank of America analyst Brad Sills forecasts second quarter EPS loss of $0.72 on revenue of $560m, up 14% from last year. Analyst consensus estimate is for an EPS loss of $0.69 on revenue of $562.8m.

Sills recently reiterated a ‘buy’ rating on the stock and a $180 price target. For the second half of 2021 Splunk shares will be boosted by a recovery in cashflow and an acceleration in annual recurring revenue growth as it hits a 50% cloud revenue mix, said Sills.

“Splunk is one of the leading solutions to address this emerging market segment [Big Data], with disruptive technology, high customer ROI, and rapidly expanding customer base,” he said, as reported by Yahoo Finance.

Splunk’s expectations versus reality

In the first quarter, Splunk posted revenue growth of 16% year over year to $502m and a loss per share of $0.91. The revenue was 1.8% higher than expectations but the losses were 26% more than the $0.72 forecast.

“Our first quarter success was defined by customers accelerating their move to the cloud,” said Doug Merritt, president and CEO of Splunk (pictured above) in June. “Data became an essential service in the past year as the pandemic solidified the urgent importance of digital transformation.”

Jason Child, Splunk’s chief financial officer added: “Our Cloud ARR exceeded 70% for the sixth straight quarter and we now have more than 200 customers with Cloud ARR over a million dollars. As we look forward, we have great confidence in our ability to deliver continued high growth, particularly within our cloud business.”

Two ETFs that can be impacted by fluctuations in the Splunk share price are the First Trust Nasdaq Cybersecurity ETF [CIBR] where Splunk has a 3.36% weighting, and the First Trust Cloud Computing ETF [SKYY] where it has a 2.04% weighting.