Investors bite on Splunk (SPLK) following price crash
Updated
Investors are showing appetite for Splunk a day after shares of the US network security and maintenance company crashed on the unexpected resignation of six-year president and chief executive Doug Merritt.
Splunk was up more than 2.25% on Tuesday on the Nasdaq Global Select market. Cathie Wood’s Ark Investment led the buying spree as its Ark Next Generation Internet ETF bought 119,677 shares.
Ark moved after Splunk’s stock closed down 18%, or $30.44, to $137.38 Monday as investors showed strong distaste for Merritt’s resignation and the company’s unfavorable preliminary fiscal third-quarter earnings results.
Since Merritt joined Splunk in 2014, the San Francisco-based company has grown annual recurring revenue to $3bn from $302m. Merritt became CEO in 2015, replacing Godfrey Sullivan, who retired. Merritt had been Senior Vice President, Field Operations.
Morningstar: Stock undervalued
Morningstar analysts Dan Romanoff and Malik Ahmed Khan said Splunk was undervalued after the sell-off.
“We are maintaining our $164 fair value estimate for now and think the sell-off is unwarranted,” the analysts wrote in a research report that Morningstar provided to Capital. com. “Splunk's fundamentals remain solid, and we therefore view the shares as attractive.”
Morningstar shrugged off Merritt’s resignation and board chair Graham Smith’s insertion as interim CEO.
“While we are surprised, we think this leadership change will be smooth, as Merritt will maintain an advisory role with the company to facilitate the transition,” the analysts said. “With Smith having been a Splunk board member since 2011 and chair since 2019, we think his expertise will also help smooth the process. Given Splunk’s strong position, we believe the firm will be able to attract a high-calibre leader.”
Smith will also remain chair while the board conducts a search for a new CEO.
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Revenue expected to rise
Morningstar estimates compound annual growth rates of 15.3% and 26.4%, respectively, for Splunk in the company’s 2022 and 2023 fiscal years.
But Cowen & Company analyst Derrick Wood said late Monday that Splunk must transition further after Merritt’s resignation.
“Ultimately, there is now more change ahead that will need to be addressed before investors can get comfortable in (management) delivering more stability to growth execution,” Wood wrote in a report that the company provided to Capital.com.
Wood said Monday’s stock-price the plunge resulted after investor sentiment on Splunk was starting to become more positive due to “a solid second quarter” and a seasonally stronger second-half ahead, along with “growing maturity” of the company’s cloud-computing efforts and the absorption of many new leaders over the past six to nine months.
Cowen: Developments a ‘negative surprise’
“As such, we view these developments as a negative surprise, and one that suggests there are more execution challenges underneath, especially given that the board did not have a replacement lined up for Mr. Merritt and, thus, this did not seem like a planned transition, at least not at this point in time,” Wood wrote. “This being said, perhaps, a leadership change is what (Splunk) needed to build for the next phase of scale, and there's a growing bench to tap from internally.”
Splunk said it expects to generate revenue of $660m for the third quarter – $10m above the high end of its guidance, which would represent 19% growth. If achieved, that total would exceed Wall Street’s forecasted 16% increase, according to Wood.
But the revenue projection for the three months ended 31 October is lower than Splunk’s $35m above-guidance increase recorded in the second quarter, noted Wood.
Company expects cloud ARR to rise 75%
He said Splunk’s anticipated 75% increase in cloud annual recurring revenue (ARR) to $1.11bn, which would fall in the middle of the company’s anticipated range, would be slightly below Cowen’s prediction of a 76% increase.
The one percent miss compares to Splunk’s average 4% average beat of Cowen estimates in the first half of 2021, added Wood.
Total ARR estimate at high point of range
Splunk’s forecasted 37% total ARR increase to $2.83bn would land the company at the high point of its anticipated range. But that level would be “softer than recent trends” whereby Splunk exceeded the high end of its range by about 1%, said Wood.
Splunk is best known for its security information and event management (SIEM) software, which collects IT infrastructure data to give systems administrators and IT security professionals a better idea of what’s happening with their systems.
Traditionally known for providing data analytics, Splunk is transitioning towards a software-as-a-service (SaaS) business model. Total ARR is considered a key metric in the SaaS sector.
“The combination of mixed results and CEO departure (with) no replacement on hand suggests there are more crosscurrents under the hood,” wrote Wood.
Splunk will report its full fiscal third-quarter results 1 December.