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Bear of the Day: Splunk (SPLK)

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When Splunk (SPLK - Free Report) reported Q3 FY21 earnings on the evening of December 2, almost nobody on Wall Street saw what was coming.

From the big miss on EPS to the withdrawing of guidance targets in out years, the cries of disappointment from investors and analysts were deafening.

They were only drown out by the sound of the stock crashing 25% the next morning on crushing volume of 30 million shares, over 10 times the average.

When I say "almost" nobody saw this coming, I mean the analysts could have looked at the trend in their declining revenue and profit estimates and seen something wicked on the way.

But maybe they couldn't see the forest for the trees, even though they had big help from the Zacks Rank.

And they even had one guy sort it all out and paint a picture for them using that collective data.

On the morning of November 11, our own Ben Rains published his Bear of the Day profile of the trends at the premier big-data "miner and modeler." Here's what he wrote...

Zacks estimates call for Splunk’s adjusted Q3 earnings to tumble 87% from $0.58 per share in the year-ago period to $0.10. Meanwhile, its third quarter revenue is projected to slip 2.3%. Similar trends are projected in the fourth quarter.

Overall, the company is projected to swing from adjusted earnings of +$1.88 to a loss of -$0.34 in fiscal 2021, with its revenue expected to dip roughly 2%. The company is projected to bounce back in a big way in FY22. Nonetheless, SPLK’s longer-term earnings outlook has trended heavily in the wrong direction.

The nearby chart shows that Splunk’s adjusted FY22 EPS estimate fell from $0.82 a share 90 days ago to its current $0.52, with a big drop coming in the last 30 days. This negative earnings revision activity helps Splunk earn a Zacks Rank #5 (Strong Sell) right now SPLK also holds “F” grades for both Value and Growth in our Style Scores system to help it land an overall “F” VGM score.

Splunk might be a stock that is best to avoid for now, especially with it trending in the opposite direction from its industry, down 10% in the last month vs. the Computer Software Services Market’s 4% climb.

(end of excerpt from Ben Rains Nov 11 article)

The Disappointment Was Heavy

Looking over the reactions from Wall Street analysts on December 3, you would think they could have benefited from a Zoom call with Ben last month after taking the company at its optimistic word during their October analyst day. Here were some of the shocked faces...

Piper Sandler analyst Rob Owens lowered the firm's price target on Splunk to $200 from $250, noting that after management reiterated guidance at a mid-October analyst meeting, he was "clearly disappointed" that the company's Q3 results fell so short of expectations with large deal delays at quarter's end weighing on bookings.

Barclays analyst Raimo Lenschow dropped his price target on Splunk to $220 from $245, describing the company's Q3 performance as "subpar all around." Lenschow observed that Splunk made a strategic mistake when it reaffirmed annual annual recurring revenue guidance at the start of the year. Still he believes long-term investors should use this opportunity to accumulate a "great asset that should come out of the pandemic strongly."

Mizuho analyst Gregg Moskowitz downgraded Splunk to Neutral from Buy, and lowered his price target to $180 from $235. He described a "very disappointing" quarter with lower than expected bookings and ARR (annual recurring revenue) as several very large deals slipped. Moskowitz commented that the company withdrawing fiscal 2023 guidance was a big blow because it "had been a major support beam for the stock." Then analyst remains concerned that the results could point to deeper execution issues that could take some time to resolve.

Stifel analyst Brad Reback downgraded Splunk to Hold from Buy, and dropped his price target to $160 from $227. Describing the company's "very disappointing" Q3 report, Reback felt that the magnitude of the company's miss, and its longer-term implications, was "especially surprising on the heels of a confident analyst day management held 11 days before quarter end." The analyst suggested there are company-specific issues that probably need to be resolved to return visibility of business trends.

Citi analyst Walter Pritchard lowered his price target on Splunk to $178 from $234, citing that the company's revenue and bookings trends were meaningfully below estimates in Q3 and management noted slippage in large deals at the end of October quarter end. Pritchard expects "significant weakness" in the shares after the negative surprise in business growth rates.

Raymond James analyst Michael Turits cut the firm's price target on Splunk to $195 from $225, highlighting October quarter results with revenue, ARR, and RPO growth coming in worse than expected. Turits says the company blamed its results on lower-than-expected close rates near the end of the quarter with 7+ large enterprise deals slipping out. The analyst adds that there is likely to be continued pressure on close rates in Q4.

BTIG analyst Gray Powell downgraded Splunk to Neutral from Buy, observing that Splunk pulling long-term ARR targets which called for 40% average growth through 2024 was a "big disappointment" following its October analyst day where management made those "bullish" medium term projections.

BMO Capital analyst Keith Bachman dropped his price target on Splunk to $180 from $235, noting the company's Q3 "disappointed on many levels", particularly coming on the heels of an "upbeat" analyst even in October. The analyst believes Splunk's underlying technology remains "well positioned" even as the company continues to undergo a "challenging business model transition".

Morgan Stanley analyst Keith Weiss slashed his price target on Splunk to $213 from $270 after the company's Q3 results came in meaningfully below management guidance. He called it "a significant negative surprise" after the company hosted what he had viewed as "an upbeat analyst day" in late October. Management cutting the company's medium-term outlook after just one quarter of slipped deals likely further shakes investor confidence, but Weiss thinks the withdrawal is probably the right move as a means to resetting the bar going forward.

Bottom line on SPLK: With all these disappointed analysts and slashed price targets came something else that cuts -- lowered revenue and earnings estimates. The magnitude of the downward revisions in the cloudy outlook, and the wide-spread agreement among Wall Street analysts, should keep SPLK in the cellar of the Zacks Rank for some time. So while this leader in big-data mining and modeling for the Global 2000 is clearly a key innovation asset going forward, there will probably be time to pick up shares cheaper before estimates stop going down and start heading back up. The Zacks Rank will let you know.

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