Splunk (NASDAQ: SPLK) Soars After Post Earnings Dip

After an ugly 20% drop earlier this month following earnings that left analysts wanting, shares of big data firm Splunk (NASDAQ: SPLK) have been soaring over the past week. They’re up 15% off the lows and quickly closing the gap down that followed their Q3 report.

Both the top line and bottom-line numbers missed analyst expectations, with revenue actually contracting 10% on the year. In a snap decision, JPMorgan was out the next day with a downgrade to shares of the San Francisco headquartered company, moving them from Overweight to Neutral. They said they were ‘blindsided by the magnitude of too many large deals slipping in the final days of October" and it could take Splunk a while to earn back investors’ confidence.

Not All Bad News

For all that though, there’s a sense that maybe the sell-side downgrade and 20% drop in shares was an overreaction. Splunk’s cloud revenue was still up 80% year on year and their total ARR was up 41% year on year. Their operating margins could definitely do with some improvement but this is a high-growth tech stock we’re talking about, not some mid-western industrial name.

CFO Jason Child struck a positive tone with the release when he said; “our cloud momentum continued in the third quarter, we exceeded our cash flow target significantly and we ended with Cloud ARR up 71% year-over-year — among the highest growth rates in the industry. While the environment was a challenge in the quarter, we are enthusiastic about the large and growing opportunity ahead and remain confident in our long-term growth trajectory.”

Indeed, JPMorgan might soon be kicking themselves for the negative downgrade as the dip in shares continues to be bought. Morgan Stanley didn’t ignore the missed earnings report either but rather than remove their Overweight rating, they simply trimmed their price target. Moving it from $270 to $213 is still a 20% haircut but it means they’re also still expecting a significant upside of about the same from where shares closed even on Monday.

Look On The Bright Side

And earlier this week, the folks over at Rosenblatt initiated coverage of Splunk with a Buy rating. They’re fans of the company’s strong growth even in the face of pandemic fuelled headwinds and expect the post-pandemic recovery to provide equally strong tailwinds. Analyst Blair Abernathy sees enough potential here to shrug off Q3’s missed numbers, and instead sees Splunk as well-positioned for the shift toward "dynamic multi-cloud IT infrastructure."

For investors getting involved, shares are currently in the middle of closing the gap which can lend itself to some serious daily momentum, as seen yesterday with the 5% pop that made them the best performer on the S&P 500 index. The stock’s MACD has also just had a bullish crossover which is considered a textbook buy signal, and shares are only just after moving out of oversold conditions, with their RSI still in the 40s.

No investor likes to see a company post a poor earnings report that misses expectations, but Splunk has too much going for it now to bet against it. If every company that reported a miss was written off, Wall Street would be a lot poorer than it is today. Already we’re seeing strong bids flow in as the savvy investor sees a deal, and the expectation on the street is still with shares to outperform rather than underperform.