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Why Splunk Shares Rose 32.4% in May

What happened

Shares of data visualization expert Splunk (NASDAQ: SPLK) gained 32.4% in May 2020, according to data from S&P Global Market Intelligence. The stock reached fresh all-time highs when the company reported solid first-quarter results on May 21.

So what

Splunk's shares were already on the rise when the earnings report came along, helped by a new cloud-computing partnership with Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary Google.

In the first quarter, Splunk's sales rose 2% year over year to $434 million. The adjusted bottom line swung from earnings of $0.02 per share to a net loss of $0.56 per share. Analysts had been expecting a $0.57 loss per share on revenues in the neighborhood of $443 million. That mixed performance might not sound like a vat of rocket fuel, especially since revenue guidance for the second quarter also fell below analyst projections, but Splunk's shares soared 13% higher the next day.

Image source: Getty Images.

Now what

Splunk's customers are trading in their old-school software licenses for cloud-service contracts by the busload. Cloud-service sales rose 81% year over year in the first quarter while license revenues fell by 27%. This business mix hurts the company's top line in the short run but promises to replace those lost license sales with subscription-style renewable revenues for years to come. The software sector as a whole has embraced this business model in recent years, and Splunk is a little late to the party. But you know the old adage -- better late than never.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anders Bylund owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Splunk. The Motley Fool has a disclosure policy.


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