Time To Take Profits: Summit Offers Trading Call On Splunk, Downgrades To Hold

Analysts at Summit Research assure it is time to take profits at Splunk Inc (NASDAQ: SPLK). In fact, in a report issued Sunday, the experts – Srini Nandury, Srini Sundararajan, Jonathan Kees and Henry Guo – downgraded the stock’s rating from Buy to Hold on an impending multiple compression. On top of the downgrade, the firm trimmed its price target from $84 to $50.

The analysts explained that they are not calling the upcoming quarter by any means and that their demotion mostly responds to their belief that “the market is in a correction mode driven by macro fears.” Moreover, they highlighted, tech stocks – especially high flyers like Splunk – are bound for a multiple compression soon.

The Trading Call

Splunk currently trades at around 8.4 times EV/C2016 sales, versus its peer group’s average of 6.3x. The experts noted, “Even adjusting for growth and even if the company beats estimates and guides up” as they expect it to, they cannot foresee a possible scenario where the shares surge from current levels given the current trading environment.

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Consequently, Summit thinks it is time to cash in and take profits. The firm assured it will get back in the name when the valuations ease up.

But The Company Looks Great!

Despite the aforementioned trading call, the analysts notice the strength in Splunk’s fundamentals, which remain intact, “driven by new applications and new use cases.” Moreover, security is becoming an increasingly important app for the company, generating more than 35 percent of revenue already. In fact, they added, “increasingly Splunk is becoming the de-facto software to monitor security threat/vulnerabilities in real time.”

Having said this, nonetheless, the experts pointed out again that “investors are actively positioning their portfolios for a selloff.”

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