Even if Splunk's cash flow ultimately ends up being slightly short of this target, right now, investors are so despondent, that any evidence that the company is on the path towards solid cash flows would be very well perceived by investors. Having said that, given that Splunk's market cap is $22 billion, this implies that investors are being asked to pay approximately 22x forward cash flow for a cloud SaaS.Īgain, amidst tech names, not many stocks are likely to generate this sort of cash flow. Given that Spunk has dropped this slide from its subsequent quarterly reports obviously implies that Splunk isn't likely to reach $1 billion of cash flows by fiscal 2023 (calendar 2022). Splunk's Path Towards Solid Cash Flows?īack in summer 2020, Splunk put out the following slide on its investor presentation: Whereas in Sumo Logic's case, investors are being asked to take a leap of faith. So in the case of Splunk, we can see that its business proposition works well. Although, the difference being that Sumo Logic is still being valued at very much a similar valuation to Splunk, however, Splunk has historically been a very strong free-cash-flow-generating company - while Sumo Logic has not. However, what we can see above is that Splunk's close peer, Sumo Logic ( SUMO) has also seen its valuation get a haircut these past several months. I follow many stocks in tech, and I don't know of many SaaS stocks that are pointing towards double-digit revenue growth rates over the next twelve months that are being valued at less than 9x forward sales. Looking out to next quarter, this implies that not only will comps look quite positive starting with Q1 2022 (this next quarter), but that the churn away from license customers will abate imminently. In fact, you can see above that its license revenue was down more than 21% y/y, but this impact will diminish over the coming quarters. What's important to keep in mind is that Splunk is towards the end of its program of transiting its customers away from perpetual licenses towards annual invoicing. Having said that, for all intents, the percentage is roughly the same. This has more to do with the comparison between bookings in the quarter versus its run rate. Note, Splunk's own reporting of its cloud contribution above shows 23% of contribution to total revenue for Q4 2021 compared with my own commentary above that puts it at approximately a third of total revenue. This implies that the rest of Splunk's revenue, including both its term licenses and maintenance contracts revenues, are both down meaningfully y/y. The problem is that Splunk's Cloud ARR only makes up approximately a third of its total revenue. Indeed, as you can see below, Splunk's cloud annual recurring growth rates continue to grow at a very rapid clip, with Q4 2021 up 83% y/y. Source: Author's calculations, **high-end company guidance, Note: Splunk's fiscal year and calendar year are misalignedįor the majority of fiscal 2021, investors were more than content to incur negative y/y revenue growth rates, because investors were willing to believe in Splunk's cloud-first initiative. Hence, as you know, in this game, being too early is synonymous with being wrong. But as it turns out, for all my ''genius'' I was too early, and the stock's sell-off only started to pick up momentum. And even while the whole of tech soared ahead, this name ended up being left behind.īut then, I turned bullish on this stock in mid-February 2021. I'd argued that investors were paying too much for a narrative that wasn't there. But there's more here than meets the eye: Background and Investors' Sentimentįor a long period of time, I was consistently bearish this stock: ![]() ![]() Indeed, right now, its outlook is quite grim on the surface. Remember, investing when the outlook is grim, is often a rewarding investment strategy. ![]() Looking further ahead into next year, Splunk has a solid path towards being highly cash flow generative. ![]() Presently, the stock trades for less than 9x forward sales, even though its guidance for Q1 2022 points towards mid-10s% y/y growth rates. By Q3 2021, the transition will be completed and Splunk will start to reap the fruits of its heavy labor. However, the company is now nearly at the end of the transition period from upfront billing to annual recurring billing. And despite having large secular tailwinds to its back, the stock has dramatically fallen out of favor with investors. Splunk ( NASDAQ: SPLK) is a real-time data, analytics, observability, and security platform. Photo by David Tran/iStock Editorial via Getty Images Investment Thesis
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