In the realm of high-growth SaaS (software-as-a-service) companies, a prevalent choice for long-term investors emerges. Such companies typically relish elevated gross margins and robust cash flows on a large scale. The SaaS model, built on subscription-based solutions, provides a stable earnings trajectory even through market fluctuations. This article delves into the recent performance reports of Snowflake (NYSE:SNOW) and Splunk (NASDAQ:SPLK), two prominent software entities, to discern the superior investment option.
Evaluating Snowflake’s Investment Prospects
Snowflake’s journey commenced with its IPO at $240 per share in September 2020, reaching a pinnacle exceeding $400 by September 2021. Despite a subsequent decline of over 60%, the company retains a market capitalization of $50.6 billion. Operating as an enterprise-focused, cloud-driven data platform, Snowflake empowers clients to explore, share, and fully utilize their data’s value. A Forrester Total Economic Impact study reveals an anticipated 612% return on investment, translating to monetary benefits surpassing $21 million over three years. The Data Cloud hosts more than 2.6 billion data queries daily, with 515 million data workloads per day, based on January 2023 statistics.
The second quarter of fiscal 2024 (ending in July) saw Snowflake achieve product sales amounting to $640.2 million, marking a 37% year-over-year surge. Impressively, 402 customers invested over $1 million in the Snowflake platform within the last year, representing a 62% annual growth. The net revenue retention rate stood at 142% by the end of the quarter, indicating a 42% spending increase among existing customers over a year. Notably, an RPO (remaining performance obligation) of $3.5 billion, carried from the July quarter, augments revenue visibility. The company’s free cash flows expanded by 50% to $88 million in Q2 due to its vigorous top-line expansion. Analysts anticipate a sales upswing of 33.4% to $2.75 billion in fiscal 2024.
However, SNOW’s post-earnings trajectory witnessed a decline attributed to revised product revenue guidance for the full year. The projection now stands at $2.6 billion, reflecting a growth rate of 34%, a decline from the earlier forecast of $2.705 billion and 40% growth.
Assessing the Case for Splunk Stock
Splunk, with a market capitalization of $20.1 billion, furnishes enterprises with a unified cloud-based security and observability platform. Originating from its IPO at $17 per share in April 2012, SPLK stock has surged more than 600%. Notwithstanding this impressive ascent, the stock presently hovers about 45% below its all-time high during the pandemic era, presenting a potential buying opportunity.
For the fiscal second quarter of 2024 (ending in July), Splunk posted sales of $910.6 million, marking a 14% year-over-year increase, alongside adjusted earnings of $0.71 per share. In comparison, analysts had projected sales of $888.6 million and earnings of $0.47 per share for Q2. The company’s annual recurring revenue (ARR) escalated by 16% to $3.86 billion, attributed to heightened expenditures from major clients. The quarter concluded with 834 clients boasting an ARR surpassing $1 million, a notable upswing from 723 in the corresponding period last year. Splunk’s adeptness in operating leverage translated to a trailing 12-month free cash flow of $805 million, registering an almost 25% boost.
Insights from Analysts’ Perspectives
Of the 33 analysts monitoring Snowflake stock, 21 advocate a “strong buy,” two endorse a “moderate buy,” nine suggest “hold,” and one advises a “strong sell.” The average price target for SNOW stock rests at $188.26, exceeding prevailing trading prices by 20.2%.
Regarding Splunk stock, out of 29 analysts, 15 recommend a “strong buy,” two propose a “moderate buy,” and eleven favor a “hold.” The average price target for SPLK stock stands at $125.32, representing a marginal 3% increase from current levels.
Choosing the Superior Tech Stock
While both Snowflake and Splunk entice growth investors, a preference leans toward Splunk due to its more appealing valuation. Snowflake may experience rapid expansion, but it bears a valuation of 18 times forward sales and 225 times forward earnings. In contrast, Splunk’s pricing lies at 5.1 times forward sales and 32 times forward earnings, a notably reasonable figure. Notably, Splunk’s well-received earnings led to multiple upward revisions in price targets from analysts, indicating potential short-term upside beyond initial estimates.
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