Why Splunk Is A 'Top Pick'

Splunk Inc SPLK shares have struggled in the past year, but Bank of America analyst Brad Sills said Thursday that the stock is still a “top pick” heading into next week’s earnings report.

Earnings Preview: Splunk shares are down 28% in the past 12 months as the company navigates a difficult shift from an on-premise perpetual license business model to a subscription-based cloud model. Sills reiterated his Buy rating and $180 price target for Splunk and said he is optimistic about the second half of 2021.

Related Link: Splunk Shares Gain As UBS Upgrades It To Buy, Increased Price Target Implies 24% Upside

Splunk reports July-quarter earnings on Aug. 25. Sills is projecting a second-quarter EPS loss of 72 cents on revenue of $560 million, up 14% from a year ago. Consensus analyst estimates for the quarter are calling for an EPS loss of 69 cents on revenue of $562.8 million.

Catalysts Ahead: Looking beyond the second quarter, Sills said Splunk has at least two bullish catalysts around the corner in the second half of the year.

First, he is predicting a significant recovery in Splunk’s free cash flow. He is projecting $116 million in FCF in the next two quarters, up from a negative $66 million in FCF in the second half of last year.

Second, Sills said Splunk’s annual recurring revenue growth will likely start to accelerate as the company reaches a 50% cloud revenue mix, likely in the fourth quarter.

While it hasn’t been smooth sailing in the past year, Sills said Splunk is still well-positioned to capitalize on the massive global opportunity in Big Data.

“Splunk is one of the leading solutions to address this emerging market segment, with disruptive technology, high customer ROI, and rapidly expanding customer base,” he said.

Benzinga’s Take: Sills’ projections for Splunk’s second-quarter earnings and revenue are both below consensus analyst estimates, suggesting he thinks the company’s guidance could be the most bullish part of next week’s report.

At some point, Splunk will need to demonstrate to investors that its painful transition to a cloud subscription model will get the company back on track for long-term growth and profitability.