Splunk, the market leader in analyzing machine data, reported a loss for the third consecutive time in fiscal Q3 2021 and disappointing January quarter guidance, sending its shares down about 19% in extended trading on Wednesday.
The provider of the data-to-everything platform reported revenues of $559 million, down 11% year-over-year, missing the Wall Street consensus of $613 million.
Splunk’s loss widened to $1.26 a share from 38 cents a share in the same period a year ago. On an adjusted basis, Splunk reported a loss of 7 cents a share, missing market expectations of 9 cents profit.
Splunk forecasts fourth-quarter revenue between $650 to $700 million, far short of the Wall Street consensus of $777.9 million.
“Following disappointing results and outlook, we are downgrading Splunk to ‘HOLD’ rating and establishing a new $160 price target. Splunk also lowered guidance for F4Q21 and pulled FY23 ARR and Operating Cash Flow guidance until the company can get a handle on the macro and the operating environment. We believe Splunk now has to execute well for a couple of quarters at least before investors can be comfortable all’s well with the company and for the stock to work,” said Srini Nandury, senior equity analyst at Summit Insights Group.
“We believe the company has the products, install base and customer goodwill that will help it in the long run. However, in the near-term, the stock will languish. For us to get comfortable with the story and recommend the stock again, we would need evidence that the company can execute and exceed its guidance, at least for a couple of quarters,” Nandury added.
Splunk’s shares closed 0.25% lower at $205.91 but later plunged about 19% to $167.50 in extended trading on Wednesday. However, the stock is up about 40% so far this year.
Splunk Stock Price Forecast
Fourteen equity analysts forecast the average price in 12 months at $241.67 with a high forecast of $301.00 and a low forecast of $165.00. The average price target represents a 17.37% increase from the last price of $205.91. From those 14 analysts, 11 rated “Buy”, two rated “Hold” and one rated “Sell”, according to Tipranks.
Morgan Stanley gave the base target price of $270 with a high of $363 under a bull-case scenario and $172 under the worst-case scenario. The firm currently has an “Overweight” rating on the software company’s stock. Berenberg raised their stock price forecast to $260 from $247.
Several other analysts have also upgraded their stock outlook. Splunk had its price objective upped by Mizuho to $235 from $225. They currently have a buy rating on the software company’s stock. Jefferies Financial Group boosted their target price to $265 from $250 and gave the company a buy rating. Barclays lifted their price objective to $245 from $195 and gave the company an overweight rating. At last, BofA Securities lifted their price objective to $260 from $249 and gave the company a buy rating.
“Splunk (SPLK) is poised to maintain its leadership in the IT Ops and Security Analytics markets with an improving platform that surfaces business insights and initiates real-time responses. With Enterprise momentum, expanding use cases and new pricing/delivery models, we see SPLK sustaining >20% growth in adj. Software ARR through FY24,” said Keith Weiss, equity analyst at Morgan Stanley.
As SPLK’s transition to term & cloud and shift towards annual invoicing continues, we see headwinds to FCF in FY21. However, we expect FCF to rebound strongly thereafter with FCF hitting $1.8 billion in FY26 resulting in a 24% FCF margin. At 11.5x EV/CY21 Rev and 38x CY22 FCF, we believe the durability of growth and strongly improving FCF are underappreciated,” Weiss added.
Upside and Downside Risks
Risks to Upside: 1) ARR grows faster than expected as a broader portfolio drives rapid market penetration. 2) Accelerated shift to cloud offerings. 3) New pricing unlocks greater usage – highlighted by Morgan Stanley.
Risks to Downside: 1) Increased competition from large tech vendors, modern pure plays and/or open-source solutions. 2) Lack of material adoption for cloud offerings. 3) New pricing fails to improve customer growth/expansion. 4) Failure to improve growth in new customers.
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