Splunk Stock Appears To Be Modestly Undervalued
- By GF Value
The stock of Splunk (NAS:SPLK, 30-year Financials) appears to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $112.41 per share and the market cap of $18.4 billion, Splunk stock gives every indication of being modestly undervalued. GF Value for Splunk is shown in the chart below.
Because Splunk is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 14.2% over the past three years and is estimated to grow 16.35% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Splunk has a cash-to-debt ratio of 0.73, which which ranks worse than 76% of the companies in Software industry. The overall financial strength of Splunk is 4 out of 10, which indicates that the financial strength of Splunk is poor. This is the debt and cash of Splunk over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Splunk has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $2.3 billion and loss of $6.65 a share. Its operating margin of -40.35% worse than 81% of the companies in Software industry. Overall, GuruFocus ranks Splunk's profitability as poor. This is the revenue and net income of Splunk over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Splunk is 14.2%, which ranks better than 71% of the companies in Software industry. The 3-year average EBITDA growth rate is -62.7%, which ranks in the bottom 10% of the companies in Software industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Splunk's return on invested capital is -25.94, and its cost of capital is 8.72. The historical ROIC vs WACC comparison of Splunk is shown below:
Overall, Splunk (NAS:SPLK, 30-year Financials) stock is estimated to be modestly undervalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Software industry. To learn more about Splunk stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
This article first appeared on GuruFocus.