U.S. Markets closed

Splunk Stock Could Hit New 2019 Lows

Bret Kenwell

Splunk (NASDAQ:SPLK) stock has been dragged down with the rest of high-growth tech. That’s even as Splunk stock trades with a more palatable valuation than most of its peers and is actually profitable with free cash flow (FCF).

Splunk stock

Source: Michael Vi / Shutterstock.com

It has been a volatile period for tech, even as the broader market and Nasdaq Composite hover within a few percentage points of their all-time highs. It has got some investors wondering if now may be the time to snap up shares of Splunk. That’s even if the chart suggests that now may not be the best time to do so.

High-growth names like Roku (NASDAQ:ROKU), The Trade Desk (NASDAQ:TTD), Shopify (NASDAQ:SHOP) and others have taken a big hit. Amid that mess, Workday (NASDAQ:WDAY), Salesforce (NYSE:CRM), and Service Now (NYSE:NOW) have come under pressure, too. The fear here is slowing growth.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

So what does that make Splunk stock?

Valuing Splunk Stock

While Splunk stock is getting caught up in the selloff, it’s worth noting that its valuation isn’t in the same nosebleed territory as other tech stocks. While many of the names getting hit have price-to-sales (P/S) ratios north of 20, SPLK stock does not. Shares trade at roughly 7.9 times this year’s revenue estimates.

Analysts expect sales to grow 28.3% this year to $2.31 billion. In calendar year 2020, estimates call for the growth rate to slow to about 22%, but that still equates to more than $2.8 billion in revenue.

On the earnings front, analysts expect 43.5% growth this year to $1.91 per share. Admittedly, estimates for fiscal year 2021 do call for a slowing growth rate. However, they still expect earnings to grow 24.5% to $2.38 per share.

Estimates are just that — estimates. They can be wrong. They can be adjusted higher or lower depending on how the company does. For Splunk stock, 7.9 times this year’s sales and 58 times this year’s earnings may not be cheap compared to Johnson & Johnson (NYSE:JNJ) or McDonald’s (NYSE:MCD). That said, these companies are not growing revenue at more than 25% or earnings at more than 40%.

SPLK stock does have about $1.67 billion in long-term debt that it added to its balance sheet this year. That’s roughly in-line with its cash holdings and about 65% of its cash and short-term investments.

While Splunk does have positive FCF (and had decent growth), it will actually generate a FCF deficit this year due to a change in its billing process. Because of the way SPLK is now invoicing, the cash isn’t received in the same manner as before. That’s not ideal, but it’s not the same as being FCF negative as a business.

Trading SPLK Stock

Click to Enlarge
Splunk stock has been under constant pressure since topping out in late July. Since then, it has put in a series of lower highs, highlighted by purple arrows on the chart. It also has very well-defined support and resistance.

Range resistance has come into play near $140, which has been in place for months. Range support is down near $107. The way I see the charts, Splunk stock has a few major downside zones.

The first is range support near $107 and the 38.2% retracement at $106.61. Below that zone and the 2019 low of $99.49 is on the table. Just below that mark is the 23.6% retracement at $97.95. The fear is that, should range support fail to hold, SPLK stock will go on to make new 2019 lows.

Should both zones give way — the $107 and $99 areas — then the last zone of support is near $90. This is where SPLK stock put in a triple bottom in Q4 2018.

Just because we’re mapping out these potential downside targets, doesn’t mean Splunk stock will fall that far. But it’s something investors should consider being a possibility.

On the upside, I would love to see Splunk stock start to put in a series of higher lows off of this range support area. Back over the 200-day would be ideal, although that’s a fair bit further from here. If range support holds, aggressive investors interested in the stock can start to get long.

Otherwise, some investors will feel more comfortable either waiting for lower prices or for cleaner price action. Given the FCF change and the fact that it’s caught up in a cloud selloff, it’s hard to disagree with those that prefer to wait.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long ROKU and TTD. 

More From InvestorPlace

The post Splunk Stock Could Hit New 2019 Lows appeared first on InvestorPlace.