Splunk Nosedives on CEO Departure, Analyst Downgrades Likely

Splunk (SPLK) nosedived around 30% in just a matter of weeks, as the cloud-based data analytics software company dropped a bombshell with Doug Merritt stepping down, and an interim CEO taking his spot. Undeniably, his stepdown has many investors hitting the panic button, but does his departure signal something ominous up ahead?

A handful of analysts downgraded their price targets on shares of SPLK modestly following the news of Merritt’s abrupt dismissal. It is definitely not a good sign, given its surprising nature and the trajectory of the business thus far. I am neutral on Splunk. (See Analysts’ Top Stocks on TipRanks)

Cloud Transition Clouds Performance, CEO Departure Is Untimely

Splunk has been quite the laggard of late, now down around 43% from its all-time high in the summer of 2020. Undoubtedly, Splunk has been spending a lot of cash, and the fundamentals have been clouded by the firm’s transition into the cloud.

While such a transition was meant to be turbulent, with numbers that looked weaker than they were, investors now have another major reason to give up on the stock, with Merritt no longer at the helm. The management move introduces another layer of uncertainty to an already difficult-to-evaluate company with an incredibly uncertain outlook. As such, I would not be surprised if further analyst downgrades cause even more selling pressure on the name.

There are many reasons why a CEO would want to leave a company. Indeed, a company can take steps to avoid an immediate 18% drop when delivering such news.

Are Management Departures Reason for Concern?

Although there’s a chance Merritt may have left on good terms, the situation does not look good in the slightest. Having an interim CEO in Graham Smith stepping up doesn’t bode too well for investor confidence, like a groomed, permanent CEO would.

Moreover, given that Merritt is leaving after the stock had already shed nearly half of its value from peak to trough, investors may think the man is jumping off a sinking ship. Indeed, CTO Tim Tully also left Splunk less than a year ago. Such high-level departures give investors the right to be concerned.

Only time will tell if that’s the case, but there is a bit of haze surrounding the firm’s future and its direction from here, with competitive pressures that could intensify over the coming years. For that reason, it’s tough to get behind the stock on weakness.

That said, I certainly wouldn’t dare short the stock, as it still has secular tailwinds at its back. The only question is if Splunk can find a top boss that can steer the ship back on course because the rough waters have made many investors woozy.

Wall Street’s Take

Turning to Wall Street, Splunk has a Moderate Buy consensus rating, based on 12 Buys and six Holds assigned in the past three months. The average Splunk price target of $188.38 implies 50.6% upside potential.

Analyst price targets range from a low of $153 per share to a high of $225 per share.

The Bottom Line on Splunk Stock

Analysts are still mostly bullish on shares of Splunk, even after the slate of recent price target downgrade. The consensus price target of $188 and change calls for over 50% upside from current levels.

Although the contrarian play holds much in the way of bounce-back potential, one has to think that further downgrades could be in the cards, perhaps enough for the consensus price target to be pulled down to much more realistic levels.

For now, competitive threats and management uncertainties are more than just noise; they could hurt the long-term fundamentals. Whether the valuation reflects such remains a question mark.

Disclosure: Joey Frenette doesn’t own shares of any mentioned companies at the time of publication.