Is Splunk’s (NASDAQ:SPLK) 110% Share Price Increase Well Justified?

It hasn’t been the best quarter for Splunk Inc. (NASDAQ:SPLK) shareholders, since the share price has fallen 17% in that time. But that doesn’t undermine the rather lovely longer-term return, if you measure over the last three years. The share price marched upwards over that time, and is now 110% higher than it was. It’s not uncommon to see a share price retrace a bit, after a big gain. If the business can perform well for years to come, then the recent drop could be an opportunity.

View our latest analysis for Splunk

Splunk wasn’t profitable in the last twelve months, it is unlikely we’ll see a strong correlation between its share price and its earnings per share (EPS). Arguably revenue is our next best option. Shareholders of unprofitable companies usually expect strong revenue growth. That’s because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.

Over the last three years Splunk has grown its revenue at 31% annually. That’s well above most pre-profit companies. Along the way, the share price gained 28% per year, a solid pop by our standards. But it does seem like the market is paying attention to strong revenue growth. Nonetheless, we’d say Splunk is still worth investigating – successful businesses can often keep growing for long periods.

The image below shows how earnings and revenue have tracked over time (if you click on the image you can see greater detail).

NasdaqGS:SPLK Income Statement April 16th 2020
NasdaqGS:SPLK Income Statement April 16th 2020

Splunk is well known by investors, and plenty of clever analysts have tried to predict the future profit levels. Given we have quite a good number of analyst forecasts, it might be well worth checking out this free chart depicting consensus estimates.

A Different Perspective

It’s good to see that Splunk has rewarded shareholders with a total shareholder return of 1.9% in the last twelve months. However, the TSR over five years, coming in at 14% per year, is even more impressive. Potential buyers might understandably feel they’ve missed the opportunity, but it’s always possible business is still firing on all cylinders. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For instance, we’ve identified 4 warning signs for Splunk (1 is a bit concerning) that you should be aware of.

If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can grow earnings.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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