San Francisco-based Splunk Inc. (SPLK - Get Rating) develops software and cloud solutions that provide and operationalize insights from data created by digital systems worldwide. It also has a strategic agreement with Tenable Holdings, Inc. to safeguard active directory and convergent operational technology environments. 

Its shares surged nearly 8.3% in price in intraday trading last week after private equity firm Hellman & Friedman announced that it acquired a 7.5% stake in the company.

However, the stock is down 18.5% over the past six months and 7.5% over the past year to close its last trading session at $129.06. While the company’s cloud annual recurring revenue (ARR) exhibited solid growth, the company’s lack of profitability, weak bottom-line performance, and premium valuation could negatively affect investor sentiment.

Click here to check out our Cloud Computing Industry Report for 2022

Here is what could shape SPLK’s performance in the near term:

Poor Bottom Line Performance

SPLK’s revenue increased 20.9% year-over-year to $901.12 million for its fourth quarter, which ended Jan. 31, 2022. The company’s cloud annual recurring revenue (ARR) grew 65% year-over-year to $1.34 billion. However, its total cost of revenue surged 27% from its year-ago value to $190.37 million. Its operating loss came in at $78.69 million. Also, its net loss increased marginally from its year-ago value to $140.82 million, while its loss per share was $0.88, representing a 2.3% year-over-year increase. 

Mixed Profitability

SPLK’s 72.6% trailing-12-months gross profit margin is 46.4% higher than the 49.5% industry average. Also, its $128.05 million trailing-12-months cash from operations is 32.3% higher than the $96.77 industry average.

However, SPLK’s 0.4% trailing-12-months CAPEX/Sales multiple is 82.3% lower than the 2.25% industry average. Also, its trailing-12-months ROA, net income margin and ROC are negative 23.1%, 50.1%, and 17.2%, respectively.

Stretched Valuations

In terms of forward Price/Cash Flow, the stock is currently trading at 53.99x, which is 193.5% higher than the 18.40x industry average. Also, its 6.74x forward EV/Sales multiple is 104.1% higher than the 3.3x industry average. Moreover, SPLK’s 52.11x forward Price/Book is 1053.9% higher than the 4.52x industry average.

POWR Ratings Reflect Uncertainty

SPLK has an overall C rating, which equates to a Neutral in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SPLK has a D grade for Stability. The stock’s 1.22  beta  is in sync with the Stability grade.

Among the 23 stocks in the F-rated Software – SAAS industry SPLK is ranked #5.

Beyond what I have stated above, one  can view SPLK ratings for Growth, Quality, Momentum, Value, and Sentiment here.

Bottom Line

Despite being among the well-known names in the burgeoning big data analytics industry, SPLK continues to face stiff competition from the industry’s leading players. In addition, analysts expect its EPS to remain negative in the current and next year. Therefore, we think investors should wait before scooping up its shares.

How Does Splunk Inc. (SPLK) Stack Up Against its Peers?

While SPLK has an overall C rating, one might want to consider its industry peers, MiX Telematics Ltd. (MIXT - Get Rating), The Sage Group Plc (SGPYY - Get Rating), and Descartes Systems Group Inc. (DSGX - Get Rating), which have an overall B (Buy) rating.

Click here to check out our Software Industry Report for 2022

SPLK shares were trading at $129.30 per share on Monday morning, up $0.24 (+0.19%). Year-to-date, SPLK has gained 11.74%, versus a -9.88% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate. More...

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