Splunk (NASDAQ) has fallen dramatically out of favour in recent years.

This company went through a difficult revenue recognition transition that made it more difficult for investors and analysts alike to see how they are doing.

Splunk’s quarterly results have been less impressive than expected due to the transition to cloud-based subscription data monitoring. This was made clear by the management to shareholders. Splunk is still a mystery in the world of cloud companies.

Splunk stock has had a difficult year. The valuation of the company looks attractive, so I am neutral. (See SPLK stock charts on TipRanks)

A lot is going on behind the scenes at Spunk. Although the stock is likely to be undervalued in this market, you might want to wait and see, considering the high number of analyst Buy ratings.

A Solid Q2 for Splunk

In late August, Splunk reported a mild earnings beat, with an EPS loss of $0.62, beating the consensus estimate by seven cents. Splunk’s quarterly earnings have been inconsistent over the last year. This latest set of results is a refreshing surprise for investors in Splunk who have been patient and waited.

Revenue rose 23.2% to $605.7 Million in the second quarter. This is a respectable increase for a company that continues to make progress in its cloud transition.

Although the worst is over, investors can expect volatility as the company looks to increase its average recurring revenues (ARR). Splunk clients are willing to stay put, which is a good sign for Splunk’s ability to grow its ARR in an increasingly competitive market. This will also bode well for Splunk as it looks to expand and improve its offerings.

However, there is uncertainty about when the company will reach sustained profitability. The stock’s large multiple (10.2x sales), lack of momentum in the share price, significant marketing and sales expenses, as well as the high share price, make it a smart decision to remain on the sidelines.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, SPLK stock comes in as a Moderate Buy. There are 16 Buy recommendations and six Hold recommendations among 22 analysts’ ratings.

The average SPLK price target is $181. An analyst’s price target ranges from $181 per share to $210 per share.

Bottom Line

Splunk’s offering has shown signs of being sticky, and shares may very well march much higher on the other side of the company’s cloud transition.

The name doesn’t seem to be timely, however, because the transition may continue making the numbers appear weaker for the time being.

You’re not the only one who is interested in investing in Splunk. Most analysts believe the name has merit. The transition is difficult, but many are looking forward to a smoother future.

Disclosure: Joey Frenette doesn’t own shares of any company mentioned at the time of publication.

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