The recent weakness in SPLK goes back to its aforementioned Q1 report on May 25. The company did beat on both the top and bottom lines, extending its winning streak vs. consensus estimates to four straight quarters. The initial knee-jerk reaction to the results was decisively positive with the stock popping by 5% right after the release. However, the positive vibes were short lived as the stock reversed course and gapped down at the open by 5.5% the next day.
The headline Q1 numbers were indeed solid, but, there were a couple blemishes that caught investors' attention. First, in regards to its Q1 results, gross margin dropped sharply year/year by 480 basis points. So, while SPLK is growing rapidly, it has not yet been able to fully leverage that into improved performance on selling price vs. cost of goods. It is also worth noting that heading into the print, the stock was rallying, up 13% over the past month. Expectations, therefore, were quite elevated, amplifying any minor disappointment in the numbers.
Secondly, and more importantly, its inline revenue guidance for Q2 and FY18 left investors dissatisfied. This guidance followed downside Q1 revenue guidance provided in its Q4 report, and, downside FY18 revenue guidance at an investor day back on January 12. So, SPLK does have a recent history of issuing conservative guidance and then topping that guidance. In other words, the inline guidance shouldn't have come as a huge surprise.
And, indeed, after the initial sell-off, the stock began to perk up a bit in early June. But then June 9 struck, when large cap tech stocks were crushed, quashing any thoughts of a reversal. The tech bashing sent SPLK careening down to the $58 level, where it had been holding up until today's downgrade at Wedbush.
In sum, it has been a rough few weeks for SPLK, taking punches from disappointed investors about its guidance, cautious analysts, and broad weakness in tech stocks. That said, SPLK is still generating strong double-digit revenue growth and has plenty of room for growth ahead. It is also comfortably profitable with impressive EPS growth projected in the coming years. Once the dust settles, this sell-off may look like an intriguing opportunity.