You’ll never lose money by taking profits. That’s a saying that’s saved cautious investors a whole lot of money over the years. And it just might apply to Splunk (NASDAQ:SPLK) and Splunk stock after its impressive run-up.
That being said, there could be more gains ahead for Splunk. Taking profits now might not seem like a great idea if you’re expecting much more upside in the near-term. After all, “buy high, sell higher” does work sometimes.
But the price action doesn’t tell the whole story. To help you make the most informed decision, it’s important to examine Splunk’s fiscal health. Moreover, investors should be aware that the company’s undergoing a shift in its business model.
If you’re on board with that, then it could make sense to hang on to Splunk shares even at a relatively high valuation.
Not the Same Splunk You Used to Know
The novel coronavirus crisis has forced many companies to change their business models or get left behind. Thus, we can’t really blame businesses for doing what it takes to adapt and adjust in the face of sweeping changes in the economic landscape.
As InvestorPlace contributor Chris Markoch explains, Splunk’s primary line of business is “to help customers analyze data and generate solutions based on that analysis.” However, Splunk certainly isn’t the only competitor in the data visualization space.
Amid the coronavirus pandemic, businesses need something to differentiate themselves in order to create an economic moat. For Splunk, pivoting to the cloud could provide a competitive advantage as the work-from-home paradigm is likely to persist for a while.
To that end, Splunk recently announced cloud-enhanced upgrades to the company’s current offering of core platform solutions. Thus, the company is rolling out its latest round of enhancements to Splunk Cloud, Splunk Connected Experiences, and Splunk Data Stream Processor.
Chief Product Officer Sendur Sellakumar emphasized the need for Splunk’s clientele to adapt, just as his own company is attempting to do: “As organizations evolve, they face many challenges including the transition from on-premises to the cloud, which increases operational complexity … With Splunk’s cloud and platform solutions, organizations can minimize those complexities and make the shift to the cloud with high scale and performance in order to achieve business value much faster.”
If you’re invested in Splunk stock now, please understand that you’re taking a stake in a company that’s different than it was a year ago or even six months ago. That’s not necessarily a bad thing, but it’s worth noting.
On the fiscal front, another important thing to understand about Splunk is succinctly reported by Markoch: “Despite multiple years of more than 25% in revenue growth, Splunk is not yet profitable.”
So what we have here is a company that’s not profitable, but whose shares are trading not just near their 52-week high, but close to their all-time high price. That’s not a combination that’s likely to appeal to value-focused investors.
It’s also a fairly compelling reason to take profits on Splunk stock if you’ve already met your profit target. As far as taking a new position goes, it might be better to wait for a sizable share price dip.
At this point, a long position in Splunk shares is basically a bet on the company’s cloud business. If you need proof of that, check out Splunk’s revenues from the company’s fiscal first quarter of 2021.
The numbers pretty much speak for themselves. The total quarterly revenues were up 2% year-over-year, while the cloud-business revenues were up 81%. Need we say more?
The Takeaway on Splunk Stock
Should you plunk down your money on Splunk? And if you’re already invested in Splunk stock, should you stay the course or take the money and run?
It depends on your outlook regarding Splunk’s cloud segment and whether it can carry the full weight of the company’s recently evolved business model. If not, then it’s perfectly okay to watch Splunk stock from the sidelines as it heads for the clouds, or not.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.