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Splunk’s (SPLK) underwhelming results may have pushed the stock lower, but might investors have a reason to bid it back up?
Shares in the real-time operational intelligence software provider have not performed well since the company released its quarterly results in December. The stock has since dropped from around $200 per share to around $149 per share as of March 2.
Yet, this recent weakness may provide a good opportunity for investors looking for tech stocks with rebound potential. Despite the recent pullback SPLK is still far from cheap, but with earnings coming out on March 3, and the potential for the company to beat expectations, a positive surprise could be enough to send shares back up.
Why It May Be Darkest Before The Dawn For SPLK Stock
With lower year-over-year sales, it’s understandable why SPLK has performed poorly over the past three months, but looking beyond the headlines, the company’s quarterly earnings hiccup is less about declining sales, and more about the company being in a transitory phase.
As the company pivots to a Sales-as-a-Service (SaaS) model, with monthly recurring fees in lieu of large upfront payments, results are going to look depressed until the transformation is complete.
Additionally, pandemic-related economic uncertainty impacted new deal activity last year. With the vaccine rollout having started in Q1, it’s possible that some of this uncertainty has dissipated, and results for the current quarter may be stronger than investors anticipate.
Better-than-expected results could signal to investors that the company has overcome its recent headwinds, and that SPLK stock is ready to head higher once again.
Cheaper Than It Looks On A Screener
Splunk is by no means a cheap stock. Trading at 9.4x estimated FY22 sales (year ending Jan 31, 2022), investors continue to price high growth into shares, even after its sell-off.
However, while it looks pricey on a stock screener, this valuation may actually underestimate the long-term prospects of this data software company. With revenue estimates ranging from $2.15 billion to $3.37 billion in the next fiscal year, the company could see up to 55.3% revenue growth, assuming results come in at the top of analysts' expectations.
As the clouds of uncertainty dissipate, together with the prospects of a pandemic recovery in 2021, the company could see higher-than-expected levels of growth in the second half of the year.
Splunk may look expensive, but given the potential for materially stronger results in the coming quarters, current valuations may be more than reasonable.
What Analysts Are Saying About SPLK Stock
SPLK scores a Moderate Buy consensus rating based on 18 Buy and 9 Hold recommendations.
The average analyst price target of $207.04 implies that Wall Street sees around 39% upside potential for the stock over the next 12 months. Price forecasts range from a high of $275 per share to a low of $160 per share. (See Splunk stock analysis on TipRanks)
Bottom Line: An Interesting Opportunity
Unlike some other SaaS stocks out there, Splunk has not reached new highs during the overall stock market melt-up. While the stock hasn’t performed well since December, those buying it today may find an opportunity to get involved in a growth story that’s being restricted by near-term headwinds.
If the company beats expectations on March 3, investors may start to jump back into the stock. That doesn’t mean an instant rebound back to the $200 level, but it may mark the start of a gradual recovery back to previous valuations.
So, what’s the best move for investors? Keep an eye on the upcoming results, as SPLK may be a beaten-down name that is ready to break out.
Disclosure: Thomas Niel held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.