After a 50% fall from grace, shares of Splunk (NASDAQ:SPLK) are starting to look like they’re ready to stop falling and turn to the upside. They certainly know how to keep investors and Wall Street alike on their toes. The cloud analytics company ripped higher with the rest of tech during the summer of 2020, and hit all-time highs in August. But there the party ended, and while few tech names are trading higher than they were last year, not many have seen their stock’s value cut in half like Splunk’s have.
One of the big drivers behind this fall has been a significant contraction in Splunk’s revenue growth, at a time while many high flying tech stocks are still managing to print double-digit percentage growth numbers. The most recent earnings report from the end of last quarter had revenue down 6% on the year and GAAP EPS firmly in the red. But there’s much more than meets the eye here, and like with so many of the current opportunities starting to pop up in equities, many of those that have been underperforming in recent months are starting to get some bullish attention. Splunk is no different.
Under The Hood
If we look a little closer at March’s Q1 report, we can see that while overall revenue fell, cloud subscription revenue jumped more than 70% on the year, while the number of their customers with ARR greater than $1 million grew 45%. For the astute observer, this tells us that Splunk is seeing success in it’s drive to pivot completely towards a cloud subscription-only model and at the same time is continuing to sell further and further up market into the enterprise space. It may be a few quarters yet before this strategy starts yielding fruit, and it will undoubtedly make for some unpleasant earnings reports along the way, but it’s harvest is on the horizon.
Still, a revenue contraction for a tech company is always going to spell trouble, at least in the short term, and this was compounded in April by the resignation of the company’s CTO which sent shares down 4% on the news. Both KeyBanc and Morgan Stanley (NYSE:MS) downgraded Splunk shares around this time in light of the internal volatility and near-term execution risk. But the $160 price target they set wasn’t long staying intact, and Splunk shares closed yesterday’s session below $120.
With little to no fundamental news in the meantime, it’s hard to understand the continued fall outside of it being related to the general softness in tech. But the bulls will take solace from the fact that for now at least there looks to have been a short term bottom put in. Shares haven’t hit a lower low since May 11 and are in fact up close to 10% in the two weeks since. Their RSI reading has come roaring back from the low 20s as technical momentum starts to build on the bid. In addition, the stock’s MACD has just had a bullish crossover which suggests that we’re in for a rally, at least in the near term.
Considering The Long
To be sure, there’s a nasty looking downtrend that will need to be definitively broken before investors can start popping the champagne again but shares look to be ready to make their best attempt at doing so since August’s all time high. They were up 1% in Tuesday’s pre market session, helped no doubt by the shift in favorable sentiment back towards the tech sector that’s been the main story this week.
Late last week, the folks over at William Blair reiterated their Outperform rating on the stock, pointing to the recent weakness as having made the risk/reward profile particularly tempting. Splunk’s recent acquisition of cloud-native security startup TruSTAR is also set to bolster its bottom line and should add upwards of 4% to the company’s cloud ARR.
Technically speaking, the $110 mark has served as solid support in the past and is where buyers have stepped in multiple times in 2018, 2019, and 2020. The signs suggest it’s going to hold for the moment and we need only look at Splunk’s chart to see what it’s capable of once it decides to turn north again after finding support here.
