Founded in 2003, Splunk Inc. (SPLK) is the world’s first Data-to-Everything Platform designed to remove the barriers between data and action. The idea is that everyone should be able to benefit from the current data and digital revolution. The company is engaged in the development and marketing of software solutions. Its offerings address diverse data sets that are referred to as big data and are specifically used for machine data.

Although Splunk’s cloud-based business delivered strong performance in its last reported quarter, its overall top-line performance declined. The stock has declined 25.3% since the company reported its third quarter results on December 2. SPLK even withdrew its long-term outlook, so it appears the company is facing challenges in a highly competitive market.

SPLK’s lower-than-expected fiscal third quarter results, its bleak outlook and a few other factors have led our proprietary ratings system to rate the stock as “Neutral.”

Here is how our proprietary POWR Ratings system evaluates SPLK:

Trade Grade: C

SPLK is currently trading lower than its 50-day and 200-day moving averages of $193.55 and $196.21, respectively, indicating that the stock is in a downtrend. The stock’s 18.3% loss over the past month reflects short-term bearishness.

For the fiscal third quarter ended October 31, SPLK’s total revenues declined 10.8% year-over-year to $558.6 million even though its cloud revenue increased 79.9% year-over-year to $144.7 million. Moreover, gross profit declined 18.7% year-over-year to $421.8 million. The company reported a net loss of $201.5 million and a non-GAAP loss per share of $0.07 for the quarter.

On November 24, SPLK announced that it had signed a definitive agreement to acquire Flowmil, a Palo-Alto based cloud network observability company with expertise in network performance monitoring (NPM). The acquisition is expected to close during the fiscal fourth quarter. Also, on October 20, the company announced that it has completed the acquisition of Plumbr, an application performance monitoring (APM) company.

SPLK launched its Observability Suite at .conf20 in October 2020. The suite is being pitched as the most comprehensive and powerful combination of monitoring, investigation, and troubleshooting solutions designed to help organizations become cloud-ready and accelerate their digital transformation.

Buy & Hold Grade: C

In terms of proximity to its 52-week high, which is a key factor that our Buy & Hold Grade considers, SPLK is poorly positioned. The stock is currently trading at 32.1% below its 52-week high of $225.89, which it hit on September 2.

Looking at the past three years, the company’s net revenue grew at a CAGR of 25.3%. SPLK has been transitioning from its legacy on-premises data analytics to a subscription-based cloud portfolio, but at a much slower rate. Peer Grade: D

SPLK is currently ranked #50 of 96 stocks in the Software – Application industry. Other popular stocks in the software-application group are Adobe Inc. (ADBE), Microsoft Corporation (MSFT), and Workday, Inc. (WDAY).

All of these industry competitors have comfortably beaten SPLK’s 2.5% year-to-date gain. ADBE, MSFT, and WDAY have gained 44.6%, 33.5%, and 32.7%, respectively, over this period.

Industry Rank: A

The Software-Application industry is ranked #22 of 123 StockNews.com industries. Companies in this industry design, develop, publish, and support software used to collect, store, report, and analyze data from various operations of a business.

This industry is thriving amid the coronavirus pandemic because many businesses have move to adapt to remote working. And with many businesses thinking and acting to make work-from-home a norm even post-pandemic, the industry seems set to continued growth.

Overall POWR Rating: C (Neutral)

Despite reporting strong performance in the cloud-based business, SPLK is rated “Neutral” due to its slowing of growth and uncertain outlook amid stiff competition as determined by the four components of our overall POWR Rating.

Bottom Line

Splunk has been facing some challenges transitioning to a subscription-based cloud portfolio; its competitors have reported no such challenges. Analysts expect revenues for its current quarter ending January 2021 to fall 14.4% year-over-year. The consensus EPS estimate for the current quarter indicates a 97.9% decline from the year-ago value. This outlook should make SPLK’s price momentum dull in the near term if the company is not able to overcome competitive challenges.

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SPLK shares were trading at $153.26 per share on Friday afternoon, down $0.23 (-0.15%). Year-to-date, SPLK has gained 2.33%, versus a 14.58% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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