Originally posted on https://financhill.com/blog/investing/splunk-stock-forecast
Splunk Stock Forecast: Smart businesses are already using big data to connect with current and prospective customers, and the results are nothing short of astonishing. The customization and personalization of communication has upped the marketing game, and it has transformed consumer experiences.
Big data has made it possible for companies to be responsive not only to their customers’ interests and preferences, but also to real-time environmental factors. Consider these examples:
Some of the biggest names in fast food are monitoring the lines in their drive-thrus.
When the wait time exceeds a certain threshold, the smart menu boards adjust to feature items that can be prepared quickly. When lines are short, menus emphasize higher-margin choices that take a little extra preparation time.
Disney parks use RFID MagicBands that connect visitors to thousands of sensors strategically located throughout the parks.
Using individual interests and preferences as a guide, the bands leverage real-time data to suggest attractions based on length of current wait, location, start time, etc.
Better still, characters can greet children by name, special needs are met upon arrival at each activity, and so on.
Big data is changing the way businesses identify cyber security threats and it is giving IT security professionals more time to take appropriate countermeasures before data is lost or stolen.
Some platforms are capable of analyzing massive amounts of historical information to spot anomalies in current cyber activity.
They can also spot unusual changes in workflow that precede “insider” security incidents, and they can watch network traffic to detect intrusions.
These examples give a small taste of what is possible through the use of big data, and organizations around the world are getting on board.
The current market for processing big data is more than $62 billion, and that will grow. Some analysts predict that by 2020, the digital universe will include 44 zettabytes of information.
Data production will be 44 times greater than it was in 2009, and the number of devices connected to IP networks will be more than three times the global population.
Soon, using data to customize consumer experiences, prevent cybercrime, and adjust workflow won’t be optional. Leveraging big data will be a must to stay competitive.
A number of data companies have attempted to develop data collection, storage, and analysis tools, but only one has been truly successful: Splunk, Inc.
Splunk [NASDAQ: SPLK] was founded in 2003 to accomplish a single mission: to make data accessible, usable, and valuable to everyone.
Innovative technology collects internal business data from an array of sources, then analyzes and produces user-friendly reporting that gives business leaders actionable insights.
The company has produced some of the most sophisticated tools available in the market today, and it’s ability to manage high-stakes concerns like cyberthreat detection is unmatched.
Much of Splunk’s growth has been through acquisition. It carefully monitors new developments in the industry and then acquires complementary businesses.
For example, Splunk [NASDAQ: SPLK] recently announced plans to purchase SignalFX for $1.05 billion. This transaction will add application performance monitoring capabilities to Splunk’s menu of services, positioning Splunk to maintain its competitive edge against rapidly expanding disruptors like New Relic and Datadog.
Splunk enjoyed a strong second quarter, and all signs point to a promising third quarter.
Fiscal 2Q revenue increased by 33 percent year over year, reaching $516.6 million. This resulted in adjusted earnings of $0.30 per share or $46.6 million, which far exceeded predictions.
Analysts had only expected earnings per share of $0.12. Better still, the company has increased guidance for fiscal year 2020 to approximately $2.30 billion. This is an increase from the $2.25 billion predicted for 2020 just three months ago.
During the earnings call, business leaders noted that the company’s cloud business grew by 80 percent year over year, resulting in ARR (annualized recurring revenue) of more than $300 million.
Furthermore, Splunk [NASDAQ: SPLK] is in the process of securing more long-term contracts and transitioning current clients to cloud or term-licensed based models which ensures recurring revenue in coming years.
Based on these results, many analysts rate Splunk a buy.
In an unexpected twist, despite all of the good news, the company’s stock price dropped by 15 percent after Q2 results were announced. Analysts are still scratching their heads over this outcome, and they have come up with a plausible theory.
In addition to the strong results and positive predictions, Splunk [NASDAQ: SPLK] reported one dramatic change to its fiscal 2020 forecast.
Three months ago, the company indicated it would have a positive operating cash flow of $250 million. In the more recent call, that figure was adjusted to a net negative operating cash flow of $300 million. This is in part due to the plan to fund 60 percent of the $1.05 billion SignalFX purchase in cash.
Negative cash flow certainly creates risk, and it is worth looking at carefully before investing in any business. Typically, this situation occurs when companies make large purchases like the SignalFX acquisition. However, it only becomes a problem if the investment is a bad one.
In Splunk’s case, it appears that SignalFX will add new capabilities that customers want, making it a smart decision. Of course, only time will tell if the acquisition produces the expected results and if it doesn’t, investors may see their shares drop in value.
Most analysts are looking at the recent drop in Splunk stock prices as an opportunity not a warning.
Because Splunk [NASDAQ: SPLK] is in such a strong position, the issue with cash flow doesn’t have them concerned. Instead, this is a chance to purchase Splunk shares at a discount, increasing the likelihood of profits in coming years.
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