This software as a service business is a long term buy at these levels

Splunk (NASDAQ: SPLK) is one of the leading data analysis and cybersecurity software that can broadly be called enterprise solutions. They specialize in data storage, indexing and analysis of machine data. The software extracts unreadable machine language and transforms it into a human-readable format that gives users information on everything from system failures to scheduling alerts. Simply put, Splunk allows businesses to operate securely and gives them insight into customer activity on their platforms.

Now I know you might be thinking that the software is probably a tough sell and a tough one to deploy as it would likely require a complex overhaul on the part of the customer. However, this couldn’t be further from the truth. The software is easy to deploy and is able to efficiently process a wide variety of data. It also has an application marketplace that allows customers to tailor the software to their business needs. They have on-premise and cloud-based solutions that allow the business to find a billing offering tailored to the customer’s needs.

Source: Getty Images.

Head winds from clouds

Splunk has faced some challenges with moving to the cloud in the past. Investors had to contend with the stock’s poor performance as the company created what is now a very attractive product. Chances are the change was needed to keep Splunk competitive and now it looks like the worst is behind the company. The action is currently close to 30% on 52 week highs, which is a great opportunity.

Cloud dollar-based net retention rate

Source: Splunk

The strong dollar-based net retention rate (DBNRR) reinforces the thesis that the cloud segment has reached a milestone. A DBNRR of 129% means the company not only probably retains most of its customers, but its customers are paying an average of 29% more than in the previous period. This is a great indication that the new delivery model is catching on and investors should pay close attention to the metric going forward.

Another challenge with the cloud is gross margin versus total gross margin. Investors shouldn’t look down on a gross margin of 60%, but some improvement would be welcome across the board.

Total gross margin versus cloud gross margin

Source: Splunk

Splunk is currently at the end of the transition to the cloud. Transitions to the cloud make sense for Software as a Service (SaaS) companies because they reduce the time and cost of client-side implementations while allowing the business to adapt quickly if demand is met. the. The cloud is also a subscription-based offering versus the licensing option with the on-premises option. Licensing offers force the customer to pay more up front, which is fine with some customers. The subscription option generates recurring revenue and may be suitable for businesses that need more flexibility from a cash flow standpoint. We can therefore clearly see the value that the hub cloud brings to shareholders. The downside to these transitions is the cost. The company has a very large Partnerverse. It is affiliated with some of the biggest players in the industry including AWS, Slack, and Zoom.

Cloud and digital transformation trends after Covid

The cloud is everywhere these days and the market is still growing. The challenge is that many potential customers don’t fully understand the value cloud services can bring to their businesses. The pandemic has accelerated large-scale digital transformation. A more socially distant world means more global use by existing and potential Splunk customers, which has been a key theme in the cloud segment for some time. We can see from the revenue trends below that the cloud segment has been on a stellar run. According to the recent profit call, the revenue growth is due to the transition of customers from traditional on-premise offerings, which is supported by the chart below.

Steady growth in recurring revenues

Source: Splunk

Splunk shareholders will be the first to tell you that its move to the cloud has divided opinions. The cloud backbone has weighed on revenue for some time now, but there are signs the company could pull it off. The pandemic has accelerated the digitization of legacy operations and the cloud hub now appears to be a prudent move.

Takeaway meals

Splunk is at the end of what could be the most significant transition in its history. Profitability is on hold right now, but this is a SaaS company with a top product that has a price / sales (P / S) ratio of just 11. We are starting to see the light at the end of the day. tunnel and investors are getting a great place to start right now. Investors can feel good about an entry here. The turnaround may take a while, but patient investors should be excited about Splunk at these levels.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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Veronica J. Snell

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