Splunk Gets Splattered On Earnings

| About: Splunk Inc. (SPLK)

Splunk (NASDAQ:SPLK) reported earnings after the close Thursday that easily beat analyst estimates. The stock though plunged down 16% on Friday. Whether this was due to the weak market or disappointment that the company didn't guide even higher is difficult to determine. Either way it shows the difficulties of owning high valuation IPOs going into the first earnings report.

Previously hot IPOs such as Jive Software (NASDAQ:JIVE), Millennial Media (NYSE:MM) and even InvenSense (NYSE:INVN) plunged after disappointing earnings reports.

Clearly investors expected too much out of these stocks as even 80% revenue growth for Splunk wasn't enough to keep the stock higher. All of the previously mentioned stocks have collapsed roughly 50% from post IPO highs, so the downside risk in Splunk could be substantial. A similar drop would be another $9 for the stock.

Splunk is leading the 'Big Data' trend and falls into one of the exciting growth sectors as Jive Software with social media business software, Millennial Media with mobile advertising, and InvenSense with motion sensing chips.

All of these stocks started hot and have cooled substantially with limited impacts to long term growth trends. The Figure below shows a comparison of the valuations of these stocks after the close on Friday.

Figure - Valuation Metrics

Company Forward P/S Revenue Growth Rate
Splunk 10.6 37.8
Jive Software 6.2 36.1
Millennial Media 3.5 59.7
InvenSense 2.5 40.1
Click to enlarge

After comparing Splunk to the other recent hot tech companies, it's difficult to get excited at buying the stock at current levels around $27. The company is likely to face more selling pressure similar to the other high fliers. The forward price to sales ratio remains at extreme highs for investors to support this stock.

Highlights of Splunk Q113 earnings.

  • Total revenue was $37.2 million, up 80% year-over-year.
  • License revenue was $24.4 million, up 68% year-over-year.
  • GAAP operating loss was $6.2 million; GAAP operating margin was negative 16.6%. Non-GAAP operating loss was $3.5 million; non-GAAP operating margin was negative 9.5%.
  • GAAP net loss was $20.5 million and included $2.7 million in non-cash, stock-based compensation expenses, and a $14.1 million non-cash, non-recurring warrant-related charge. Non-GAAP net loss was $3.7 million.
  • GAAP loss per share was $0.71 based on a 28.7 million weighted-average share count. Non-GAAP loss per share was $0.04 on a 94.6 million share count.
  • Operating cash flow was $11.6 million with free cash flow of $9.7 million.

The numbers aren't that bad on a relative basis and clearly better than expected. The company is generating solid cash flow. Unfortunately, investors or maybe it's just traders don't seem to understand what they owned. Investors would be wise to follow this stock from a distance until the stock shakes out. The company remains solid regardless of the price action.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Please consult your financial advisor before making any investment decisions.