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Why Splunk Stock Dropped 17.4% in May

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Steve Symington, The Motley Fool
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What happened

Shares of Splunk (NASDAQ: SPLK) fell 17.4% in May, according to data from S&P Global Market Intelligence, despite another better-than-expected quarterly report from the operational-intelligence platform company.

In fact, after trading roughly flat for the first few weeks of the month, even as the broader market fell on global macroeconomic worries and trade concerns, virtually all of Splunk's drop last month occurred after its update hit the wires on May 23. In that update, the company confirmed its quarterly revenue had soared more than 36%, to roughly $425 million (above guidance for $395 million), translating to surprise adjusted net income of $3.2 million, or $0.02 per share (versus estimates for a loss of $0.14 per share).

What's more, Splunk increased its full-year revenue outlook by $50 million, to $2.25 billion.

Stock market data with white arrow indicating losses.
Stock market data with white arrow indicating losses.

IMAGE SOURCE: GETTY IMAGES.

So what

As I wrote a few days later, many investors frowned over Splunk's decision to also significantly reduce its guidance for full-year operating cash flow by $100 million, for a new full-year target of $250 million. Splunk management explained during the subsequent call, however, that its lower cash-flow expectations primarily stemmed from the company's faster-than-expected shift to renewable bookings as it moves toward a cloud-based subscription model rather than favoring older lump-sum perpetual licenses.

Now what

To be clear, Splunk's cash-flow pressure today stems from the company's incredible momentum as recurring revenue continues to build. Over the longer term, its strength will eventually become more clear to our fickle market. I think patient investors would be wise to consider opening or adding to their positions before that happens.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Splunk. The Motley Fool has a disclosure policy.