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High-growth SaaS (software-as-a-service) companies remain a top choice for long-term investors. Typically, these companies enjoy high gross margins and robust cash flows at scale. Moreover, SaaS companies offer their portfolio of solutions on a subscription-based model, allowing for relatively predictable earnings across market cycles.
Over time, an expanding customer base and wider adoption of solutions act as key revenue drivers for SaaS stocks. Here, we look at two top software companies in Snowflake (SNOW) and Splunk (SPLK), to see which is a better buy after their recent earnings reports.
The Case for Snowflake Stock
Snowflake went public in September 2020 at $240 per share, and touched an all-time high above $400 in September 2021. Now down more than 60% from those highs, Snowflake stock is valued at a market cap of $50.6 billion.
Snowflake has an enterprise-facing cloud-powered data platform that allows customers to explore, share, and unlock the true value of their data. According to a Forrester Total Economic Impact report, Snowflake’s customers can expect a return on investment of 612%, with total monetary benefits valued at over $21 million over a three-year period. Based on the average daily queries in January 2023, Snowflake’s customers have over 2.6 billion data queries on the Data Cloud, with 515 million data workloads running each day.
In Q2 of fiscal 2024 (ended in July), Snowflake reported product sales of $640.2 million, an increase of 37% year over year. Around 402 customers have spent at least $1 million in the last 12 months on the Snowflake platform, an increase of 62% year over year.
The company ended Q2 with a net revenue retention rate of 142% which means existing customers increased spending by 42% in the last 12 months. Snowflake also ended the July quarter with an RPO (remaining performance obligation) of $3.5 billion, providing investors with revenue visibility.
Due to its top-line growth, Snowflake’s free cash flows grew by 50% to $88 million in Q2. Analysts expect sales to surge by 33.4% to $2.75 billion in fiscal 2024.
However, SNOW shares fell after earnings, as investors zeroed in on a cut to full-year product revenue guidance. Snowflake now expects $2.6 billion, or 34% growth - down from a prior forecast of $2.705 billion, or 40% growth.
The Case for Splunk Stock
Valued at $20.1 billion by market cap, Splunk offers a cloud-based unified security and observability platform to enterprises.
SPLK stock went public at $17 per share in April 2012, and is up more than 600% since then. Despite these impressive gains, the tech stock is currently trading about 45% below its pandemic-era all-time highs, suggesting there's a potential opportunity to buy the dip.
In fiscal Q2 of 2024 (ended in July), Splunk reported sales of $910.6 million, an increase of 14% year over year, with adjusted earnings of $0.71 per share. Comparatively, analysts forecast sales at $888.6 million with earnings of $0.47 per share in Q2.
The company’s ARR, or annual recurring revenue, was up 16% at $3.86 billion, bolstered by higher spending from large customers. Splunk ended the quarter with 834 clients with an ARR of more than $1 million, up from 723 in the year-ago period.
Due to its asset-light model, Splunk enjoys a high operating leverage, and reported free cash flows of $805 million on a trailing 12-month basis - an increase of almost 25%.
What Do Analysts Think?
Out of the 33 analysts tracking Snowflake stock, 21 recommend a “strong buy,” two recommend a “moderate buy”, nine recommend “hold,” and one recommends a “strong sell.” The average price target for SNOW stock is $188.26, which is 20.2% above current trading prices.
Out of the 29 analysts tracking Splunk stock, 15 recommend “strong buy”, two recommend “moderate buy,” and eleven recommend “hold.” The average price target for SPLK stock is $125.32, which is only about 3% above current levels.
Which is a Better Tech Stock?
Both Snowflake and Splunk are top stocks for growth investors. But if I have to pick a winner, I’d go with Splunk, due to its much lower valuation.
While Snowflake is growing at a faster pace, it's valued at 18 times forward sales and 225x forward earnings. Comparatively, Splunk stock is priced at 5.1x forward sales and 32x forward earnings, which is very reasonable.
Additionally, SPLK has received multiple price-target hikes from analysts after its well-received earnings, and Wall Street could continue to issue more upward revisions in the short term - suggesting there's more potential upside here than current estimates would indicate.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
