Cloud service provider Splunk (NASDAQ: SPLK) has seen its share price take another slump on the news it's CEO, Doug Merritt, announce that he's stepping down. This is a blow for the company that had been showing signs of share price recovery.
Splunk is a software provider with a suite of product offerings, including Splunk cloud, Splunk light and Splunk enterprise. It also offers solutions for IT operations, cybersecurity, IoT, application analytics, business analytics and various industries.
Splunk has been attempting to pivot to the cloud from its position as a traditional software provider, but the transition has been less than smooth in the eyes of investors. Doug Merritt's resignation compounds this uncertainty, and shares finished the day down 18% on the news.
Why is Doug Merritt stepping down?
Merritt has been in the CEO position for six years and intends to stay on as an advisor to help with a smooth transition. He is being replaced initially by Graham Smith, current chairman of the board. This is temporary until a permanent replacement is appointed to the position.
Commenting on the news, Doug Merritt said:
“As the Board and I considered how to best position Splunk for long-term success and continued growth, we determined now is the right time to transition to our next phase of leadership - in particular, the Board is focused on identifying a leader with a proven track record of scaling operations and growing multi-billion dollar enterprises.”
Merritt also pointed out that Splunk has evolved significantly since he joined the business. Indeed, it has grown its revenue from $302 million in fiscal 2014 to nearly $3 billion in ARR in Q3 of fiscal 2022.
The change of CEO announcement comes less than five months after private equity firm Silver Lake invested $1 billion in the business. This may signify their influence over the future direction of the company.
Shareholders are used to SPLK share price volatility
The Splunk share price has endured a volatile few years, with COVID-19 uncertainty initially hitting it hard, followed by buoyancy through to Autumn 2020. But between October and June 2021, the Splunk share price cratered. Since then, it had been gradually recovering until yesterday's news thwarted that recovery with a significant share price drop.
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While the share price initially rose, most likely on the back of sector hype and enthusiasm, the pandemic undoubtedly presented operational challenges to Splunk. Revenue in its fiscal year ended January 2021 fell 5.5% year-over-year.
Should you buy Splunk shares in this dip?
It's not all doom and gloom. Along with the resignation announcement came preliminary results for fiscal Q3 2022. This includes revenue estimates of $660 million, beating analyst estimates of $646 million.
Furthermore, the consensus from 38 FactSet analysts gives an Overweight rating to the SPLK share price with a target price of $179. Therefore, some investors may like to take a closer look.
Q3 earnings results will come out on 1 December 2021, so it might be prudent to wait and see how it fares. Q2 earnings per share (EPS) of -62 cents beat consensus estimates and significantly improved the 91-cent loss in Q1.
Splunk prides itself on keeping the nation safe with its cybersecurity solutions. Indeed, the data analytics firm has had the US government as a customer for over a decade. With cybersecurity threats on the rise, investors are keen to be in this area of growth. So, if you can handle the volatility, it may prove to be a good long-term play.
However, it's a competitive space, and reduced revenues, tighter margins, losses or reputational damage could cause the share price to fall once more.