After being up over 15% in 2020, shares of Splunk (NASDAQ:SPLK) is now negative for the year. It seems even tech stocks with seemingly little exposure to the coronavirus are being swept up in the market uncertainty. Last week, Splunk stock lost 9.2% compared to the Nasdaq 100 index’s 7.6% drop.
Even with the market volatility, Splunk is outperforming the broader market. Prior to the selloff this week the S&P 500 index was up around 5% for the year. The index has given up those gains however, and now the gauge is in negative territory for the year.
Splunk will report earnings on March 4. The whisper number says the company will deliver positive earnings per share (EPS) of $1.00. That would beat the consensus estimate of 96 cents per share and be up over 70% from the prior quarter.
Thoughtful investors will wonder if this recent plunge is just a bump in the road. Or is it the beginning of a larger correction. The coronavirus is introducing uncertainty into the stock market in a way that has not been seen since the financial crisis of 2007.
Is Splunk Stock Overvalued?
In Splunk’s Q4 2018 earnings report, the company posted a 40% year-over-year (YoY) increase in revenue. Their net loss narrowed to 55.7 million. And the company posted negative earnings per share (EPS) of 38 cents.
In its most recent earnings report, data-analytics-software maker reported revenue of $603 milion which was a 30% YoY increase. It also posted earnings of 60 cents per share. At that time, Splunk was projecting $780 million in revenue for the fourth quarter. This would be approximately 5% above the consensus estimate.
In January, my InvestorPlace colleague Luke Lango made the case that Splunk stock was overvalued. At the time Lango wrote his article, the shares were up about 10% from its price as of this writing ($150).
However, Lango also predicted the stock would move higher in spite of those concerns. Almost on cue, Splunk stock powered up 10% in the month of February.
Had it stayed there, I might be a bit skeptical about the stock’s post-earning prospects. After all, analysts have given Splunk stock a 12-month price target of $164. Prior to the selloff, Splunk was trading for over $170.
But pullbacks, and even corrections, can create opportunities. And this recent move downward may be just the signal investors were looking for.
Good Stocks Don’t Suddenly Become Bad
At times like this, it helps to remember that good stocks don’t suddenly become bad. The fundamentals and astute technical analysis have to be your guides. And in the case of Splunk, the company is a leader in an industry that is only going to get bigger.
Matt McCall and the InvestorPlace research team explained why demand for big data will only be increasing. Splunk offers software tools that help them analyze the data and create real-time solutions.
The more Splunk falls during this market selloff, the more opportunity investors have to grab the next leg up of its rally. Splunk may be defying its valuation, but it’s best to not fight the trend.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securites.
