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Splunk Inc (SPLK): The Higher Splunk Stock Goes, The Harder It Falls

Shares of Splunk Inc (SPLK) have gained over 80% since their February low. Yet, even in the wake of that recovery, Splunk stock is still more or less flat for the full year-to-date period, and is actually around 13% in the red over the last 12 months.

Splunk Inc (SPLK): The Higher Splunk Stock Goes, The Harder It FallsThe most recent catalyst for the uptrend was earnings, as SPLK posted yet another quarter of its signature strong sales growth.

Splunk is a tech company based in San Francisco, and it hangs its hat on offering software that helps companies turn machine data (i.e., data from the Internet of Things) into operational data. When the company first hit the public markets back in 2012, its quarterly sales growth was expanding by around 80% year-over-year.

Sales have continued to chug higher, although that growth has naturally cooled a bit. Still, a top line expanding by around 50% year-over-year each quarter is hardly anything to sneeze at.

More specifically, revenue grew by 48% to $186 million in Q1, topping the consensus of $174 million and representing the sixth straight sales beat for SPLK.

After the beat, Splunk stock also continued its signature rollercoaster, although on a much smaller scale. Shares dropped in after-hours trading but regained those losses and then some when the markets actually reopened.

Splunk Stock’s Problem

The problem for SPLK in recent years (and in the most recent report) is that the company’s top-line growth isn’t quite translating to bottom-line growth … yet. Some folks see this as a positive; it’s an, Inc. (AMZN)-like strategy to shrug off profitability in favor of investing in revenue growth and market share.

But while Splunk is a leading player in a growing market, it hardly has the same buzz-factor and ubiquity as Amazon. Indeed, focusing on enterprise clients tends to translate to a bid for profitability. Plus, the rockiness in the market of late has changes the risk appetite of many investors.

As I’ve mentioned before, analysts are hoping the profits will accumulate exponentially for SPLK. Indeed, the current quarter and current year are supposed to finish in the black, while long-term earnings growth is estimated to average 50%, matching the recent sales expansions.

The problem, though, is that these expectations leave little room for error. And, unfortunately, razor-thin margins combined with a frothy stock turn small errors into big errors.

In fact, profitability was expected in the most recent quarter. The strong sales growth resulted in an adjusted operating loss of $1.4 million, or 2 cents per share, thanks to an adjusted operating margin of -0.7%. Meanwhile, estimates were for a positive margin between 1% and 2%.

That’s worrisome considering Splunk stock’s premium: a forward price-to-earnings ratio of 118.4, a price-to-earnings-growth ratio of 4.2, a price-to-sales ratio of 10.5 and a price-to-book ratio of 9.2.

So while SPLK stock has posted quite the recovery since February, be cautious about making a bid at these levels without more proof that consistent profitability is actually on the horizon.

The higher Splunk stock moves without sound results, the further it will fall following a small disappointment.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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