The world’s first data-to-everything platform provider Splunk Inc.’s (SPLK) offerings include Splunk Platform, Splunk Solutions, and Splunk IT Solutions. The San Francisco-based company’s customers include The Coca-Cola Company (KO), Intel Corporation (INTC), and Zillow Group, Inc. (ZG), to name a few. SPLK announced in June 2021 that Silver Lake would be making a $1 billion investment in its senior convertible notes to support its continued business transformation. As a result, its shares soared 27.7% in price over the past three months.

However, the stock has lost 28.7% in price over the past year and 23.2% over the past nine months to close yesterday’s trading session at $158.11. 

Among investor concerns, an investigation is being undertaken over possible security violations by the company. Also, SPLK’s losses widened significantly in the second quarter, and its non-GAAP operating margin is expected to remain negative in the third quarter. Furthermore, several hedge funds have sold the stock recently. So, SPLK’s near-term prospects look bleak.

Click here to check out our Software Industry Report for 2021

Here are the factors that we think could influence SPLK’s performance in the upcoming months:

Top Line Growth Doesn’t Translate into Bottom Line Improvement

SPLK’s top line surged 23.2% year-over-year to $605.74 million for its  fiscal second quarter, ended July 31, 2021. The company’s cloud annual recurring revenue (ARR) increased 72% year-over-year to $976 billion. However, its total cost of revenues increased 38.9% from last year to $183.41 million. Its operating loss came in at $344.43 million, up 43.8% year-over-year. Also, its net loss increased 46.9% year-over-year to $383.95 million, while its loss per share was $2.34, representing a 42.7% year-over-year rise.

Ongoing Investigation

A lawsuit was filed against SPLK by the Shareholders Foundation, Inc. on December 4, 2020, alleging security violations. In addition, the company is accused of making materially false and/or misleading statements and/or failing to disclose that it was not closing deals with its largest customers in the third fiscal quarter of 2021. As a result, a consolidated complaint was filed against SPLK on June 7, 2021. This could impact the company’s reputation negatively.

Poor Profitability

In terms of trailing-12-month CAPEX/Sales, SPLK’s 0.65% is 71.5% lower than the 2.28% industry average. Also, the stock’s trailing-12-month net income margin is negative, versus the 6.20% industry average. Moreover, its trailing-12-month ROCE, ROTC, and ROTA are negative compared to the  8.25%, 4.80%, and 3.57% respective industry averages.

POWR Ratings Reflect Bleak Prospects

SPLK has an overall D rating, which equates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. SPLK has a C grade for Quality, which is in sync with its lower-than-industry profitability ratios.

The stock has a C grade for Value, consistent with its 10.27x and 10.07x respective  forward EV/S and P/S, which are higher than the  4.21x and 4.23x industry averages.

Moreover, SPLK has a D grade for Sentiment. This is justified because analysts expect its EPS to remain negative in the current quarter and current year. Also, its EPS is expected to decline at a 56.7% rate per annum over the next five years.

SPLK is ranked #98 out of 146 stocks in the Software – Application industry. Click here to see SPLK’s ratings for Growth, Stability, and Momentum as well.

Bottom Line

Even though SPLK is one of the well-known names in the growing big data analytics industry, it continues to face increasing competition from top players in the space. In addition, analysts expect its EPS to remain negative in the coming quarters. So, we think it could be wise to avoid the stock now.

How Does Splunk (SPLK) Stack Up Against its Peers?

While SPLK has an overall POWR Rating of D, one  might want to consider investing in its industry peers with an A (Strong Buy) or B (Buy) rating: Commvault Systems, Inc. (CVLT), Open Text Corporation (OTEX), and Oracle Corporation (ORCL).

Click here to check out our Software Industry Report for 2021

SPLK shares rose $1.75 (+1.11%) in premarket trading Friday. Year-to-date, SPLK has declined -5.90%, versus a 22.13% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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