Splunk (SPLK) is a cloud and data analytics software provider. The company offers a real-time data platform containing features such as collecting, streaming, machine learning, and more. Furthermore, Splunk also offers other modern solutions, such as Splunk Security, allowing cybersecurity experts to streamline their workflow processes. I am bearish on the stock.
The Herding Effect
Splunk was a beneficiary of the proclivity of investors to invest heavily in unfamiliar technology stocks after the initial pandemic lockdowns. A herding effect is common in investment practice and refers to a market consensus where investors follow the crowd’s opinion instead of their rational investment analysis.
Herding can be achieved in various ways, but common denominators are rumormongering, pumping and dumping, and market gunning. These aspects come as a consequence of intentional market influencing by certain institutions and subjective media outlets.
Splunk’s stock price reached phenomenal peaks in 2020 by more than doubling in value, but a subsequent downturn followed this in 2021, as it lost more than a third of its value. I can’t be 100% certain in saying this, but it seems as though people have started herding in the other direction during 2021, and I expect 2022 to follow a similar trajectory.
Overvalued & Insider Selling
Although the stock lost a large portion of its value in 2021, it would be naive to think that this represents a recovery trade opportunity. According to Splunk’s price/sales and forward price/cash flow metrics, the stock is overvalued by 75.7% and 798%, respectively, compared to the sector median.
Furthermore, there’s been a large amount of insider selling within the firm, indicating that the company’s executives aren’t convinced that the value of their stock options will increase anytime soon.
TipRanks’ insider transactions tool shows that the mood within Splunk’s camp has been very negative, with the overwhelming majority of insider trades being uninformative sells.
The TipRanks insider trading scanner detected a total of 51 sell transactions and only 21 buy transactions by company executives during 2021, which provides an overwhelmingly bearish outlook.
Liquidity Issues at The Wrong Time
TipRanks’ algorithm indicated that Splunk’s ability to sell is a considerable risk for the company as it has recently pivoted from its previously successful proprietary sales model to a subscription-based model.
Splunk Completed this transition in early 2022 but has yet to see improvements in topline growth come to fruition as annual revenue growth has slowed down to 10.64% in the last twelve months versus 37.7%, and 30.8% in 2019 and 2020, respectively.
Further to the “ability to sell” worries is the fact that the cloud space is heating up. Ever since the work-from-home model started, firms have started piling in massive amounts of cash into cloud and data analytics solutions, making market share more challenging to ascertain. Consequently, I believe that investors may price Splunk’s stagnating market share growth during 2022, causing further downside.
Momentum Just Isn’t Happening
The stock’s still trading below its 50-, 100-, and 200-day moving averages after a Christmas period in which you’d have expected the stock to rebound amid a 2.8% bounce in the Nasdaq. With its RSI hovering in the mid-range at 42.5 and with volume flat, it seems very unlikely that the stock is set for a bullish period.
Wall Street’s Take
Turning to Wall Street, Splunk has a Moderate Buy consensus rating, based on 14 Buys and eight Holds, assigned in the past ten months. The average Splunk price target of $167.11 implies 45.6% upside potential.
Concluding Thoughts
Splunk stock may look like an undervalued stock based on the value it lost in 2021, but there are significant headwinds involved with management jumping in on the act and selling much of their ownership in the company.
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Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.
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