How will Splunk’s share price react to third-quarter earnings?

Splunk’s [SPLK] share price began the year at $151.98 on 2 January, before surging to $174.17 on 19 February. Then came the coronavirus pandemic-led market plunge, sending Splunk’s share price down to $95.71 on 16 March. Splunk’s share price recovered, hitting $188.98 on 3 June as, despite clear caution around business spend, it helped organisations deal with the pandemic through innovations such as Remote Work Insights.

Splunk’s share price shot up to $223.59 on 1 September, but dropped to $174.89 on 18 September before recovering again to $219.46 on 22 October. As of 30 November, Splunk’s share price is up 36.3% for the year at $204.18.  

As the data analytics software group prepares to release its third-quarter earnings on 2 December, will Splunk’s share price find some momentum?

A tricky transition

Clients were migrating more to the cloud during the crisis, with second-quarter figures released on 26 August revealing that cloud revenues had jumped by 79% to $126m.

However, the rebalancing away from upfront licensing payments saw total revenues slip 5% to $492m. Its net loss deepened to $1.64 per share from $0.67 a year ago.

Splunk and its Data-to-Everything platform is moving from a licensed revenue model to cloud subscriptions. This is a tricky transition which will impact both revenues and margins.

In its Q3 outlook, the company said that it expected revenues to come in between $600m and $630m, lower than analysts’ forecasts of $642.4m.

Doug Merritt, CEO of Splunk, was bullish: “Our customers are turning to Splunk Cloud faster than ever before, thanks to its rapid time to value, high velocity of innovative features and lower total cost of ownership. More and more organisations are accelerating their move to cloud-based services in response to the pandemic.”

“Our customers are turning to Splunk Cloud faster than ever before, thanks to its rapid time to value, high velocity of innovative features and lower total cost of ownership. More and more organisations are accelerating their move to cloud-based services in response to the pandemic” - Doug Merritt, CEO of Splunk

Looking ahead to Q3, analysts at Zacks Equity Research expect Splunk’s earnings to fall 82.8% from last year to $0.10 and revenues to drop 2.2% to $612.34m. It expects a similar story in the fourth quarter, with full-year revenues expected to drop 1.7%.

Again, this is due to cautious business spend in the recession and the switch in revenue model.

However, Splunk’s share price and wider business is expected to bounce back in FY 2022, with revenues growing 24.4% and earnings jumping over 250%.

The road ahead

The consensus rating on Splunk’s share price according to analysts surveyed by the Financial Times, is Outperform. Optimism seems to be spreading across the board for the stock.

"We have confidence in Splunk's strategic value and with cloud mix accelerating, we see a clear path to a more predictable model," said Rob Owens, analyst at Piper Sandler.

The 36 Wall Street analysts polled by MarketBeat have given the stock a consensus rating of Buy, with a target price of $232.82.

“We have confidence in Splunk's strategic value and with cloud mix accelerating, we see a clear path to a more predictable model” - Rob Owens, analyst at Piper Sandler

Cestrian Capital Research, writing on Seeking Alpha, however, has been neutral on the stock, stating that Splunk’s business transition is “expensive, slow, frustrating and fraught with risk of being overtaken by lighter-footed new entrants”. The “fundamental pain” is not yet over for the company, due to its gross margin of 53% for cloud services in Q2. “That’s not great given that a modern cloud software business can achieve 75% plus,” Cestrian Capital Research stated.

Splunk “must provide the computing infrastructure with its cloud-based offerings”, Herve Blandin wrote in The Motley Fool. In comparison, Splunk’s licensing business was less expensive given that it simply involves distributing software to client’s existing infrastructure.

Looking to the longer-term, Splunk’s share price is in a strong position. Businesses are migrating more to the cloud, creating more data, and seeking ways to store, monitor and utilise it in order to improve performance.

“Splunk's transition to the cloud is happening faster than anticipated. The company is poised to profit from the explosive growth of data in the coming years” - Herve Blandinl

Indeed, according to research group IDC, global data will grow 61% a year to 2025.

“Splunk's transition to the cloud is happening faster than anticipated,” Blandin noted. “The company is poised to profit from the explosive growth of data in the coming years.”