Splunk share price: what to expect in Q1 earnings

Splunk's [SPLK] share price has shot up this month as investors buy into cloud services. Investors have flocked to Splunk and other tech stocks as companies increasingly move systems to the cloud. And with the coronavirus outbreak, that trend is only gathering pace. Yet, Wall Street is predicting that the business analytics company will post a decline in earnings in this week's Q1 earnings call.

If the company can beat Wall Street's expectations, then Splunk's share price could continue to rally. So what should Splunk’s share price investors, and those thinking about trading the stock, be looking out for in Q1 earnings?

When is Splunk reporting Q1 earnings?

21 May

What's happening with Splunk's share price?

Splunk's share price is up almost 28% over the past month. While it still has some way to go to get back to its year high of $176.31, it's certainly heading in the right direction

However, Splunk's share price hasn't been immune from the ongoing market turbulence. At the start of March, Splunk's share price nosedived as it offered weak guidance for 2021 revenue. The company announced that it expects revenue of $2.6 billion, against the expected $2.88 billion.

Why should investors care?

Growing cloud business

Splunk has shifted its strategy to focus on its subscription-based cloud, which it sees as a huge growth area. In Q4, Splunk’s cloud revenues were up 86% year to year, coming in at $99 million. And according to Jason Child, Splunk’s chief financial officer, there’s more to come:

“As we deliver increasing value from our expanding product capabilities, customers are turning to our cloud offerings more and more. We expect our cloud products could represent more than 60% of our total software business in the next few years,” Child commented on Splunk’s Q4 earnings.

Investors should pay close attention to this metric on Thursday to see if the strategy shift is paying off.

“As we deliver increasing value from our expanding product capabilities, customers are turning to our cloud offerings more and more. We expect our cloud products could represent more than 60% of our total software business in the next few years” - Jason Child, Splunk’s CFO

Analysts slash price targets

Splunk's reliance on larger deals, difficult to close amid the ongoing coronavirus outbreak, is giving analysts pause for thought. Last month Needham analyst Jack Andrews lowered his price target from $181 to $160 citing this reason. Yet, Andrews is still bullish on the stock, maintaining his Buy rating.

Less bullish is Cowen & Co's J. Derrick Wood. Wood downgraded Splunk from Outperform to Market Perform also arguing a "heavy reliance on large deals" and coronavirus headaches are a concern. Wood cut his share price target on Splunk from $165 to $140 - a 14% downside on the current price.

Similarly, April saw Deutsche Bank trim its share price target on Splunk from $170 to $140 on recession fears. However, the German bank kept its Buy rating on the stock despite the steep cut.

What are analysts expecting for Splunk's Q1 earnings?

Analysts are expecting Splunk to post a loss of $0.57 per share, down from earnings of $0.02 a share seen in Q1 last year. Revenue is pegged at $442.2 million. Splunk itself has guided for Q1 revenues of $450 million. If revenue comes in nearer the company's expectations then Wall Street's, the share price could move post-earnings.

Is a beat on the cards? In Q4, Splunk narrowly missed Wall Street's earnings expectations. The company posted earnings of $0.96, missing the expected $0.97. However, in the three quarters before it delivered three beats on the trot.

Time to buy Splunk’s share price?

For those hoping for an immediate surge in Splunk's share price, it might be worth holding off. According to CNBC's Jim Cramer: “data analytics play tends to get hit when it reports because people don’t understand it, and then they sift through it the next day".

If the share price retreats from current levels it could be a buy, assuming it is able to then ride the trend for anything cloud-related. An average $151.73 12-month price target would see a 7.4% downside on the current share price.

Of the 43 analysts tracking the stock on Yahoo Finance, 33 rate Splunk either a Buy or a Strong Buy. None rate it a Sell. However, Splunk has major questions about its profitability. With a net profit margin of -14.27% and net income falling year-on-year, it has a long way to go before being in the black. A market cap of $24.8 billion means investors must have a lot of faith in Splunk’s long-term prospects.

Splunk share price vitals, Yahoo Finance, 21 May 2020