Name That Trade – Give Up that $SPLK, Gotta Have That $SPLK ?

by Dan May 28, 2015 1:58 pm • Commentary

Event: Infrastructure Software maker Splunk (SPLK) reports their fiscal Q1 results tonight after the close. The options market is implying about an 8% one day move, which is shy of the 4 qtr avg of about 10%. The last 2 quarters the stock has moved about 3% (one up one down) while the prior 2 quarters to those the stock moved about 17% (one up one down). The stock either moves big on earnings, or it barely does, the long term average is about 10%. In 12 quarter since going public the stock has had 6 moves above 12%, and 6 moves below 8%.

This week we have seen two earnings reports from two large cap high valuation tech stocks that have seen very different responses to earnings, Palo Alto Networks (PANW), up 4% today and Workday (WDAY), down 13% in the last two days. What’s interesting to me about these two stocks is that they both have about $15 billion market caps, both almost about $1 billion in sales, and both are in the middle of very hot secular trends in tech, PANW, network security, and WDAY, Software as a Service. Which is why I am now connecting the dots to SPLK in “Big Data” software. These three trends in tech are three of the buzziest of buzzwords. All three of these stocks trade at about 14x current sales, all with sales growth between 30 and 45%.

SPLK stock is nearing a breakout level back towards the 52 week highs:

[caption id="attachment_54020" align="aligncenter" width="600"]SPLK since Jan 2014 chart from Bloomberg SPLK since Jan 2014 chart from Bloomberg[/caption]

Much like WDAY prior to results and has since had a massive rejection:

[caption id="attachment_54019" align="aligncenter" width="600"]WDAY since Jan 2014 chart from Bloomberg WDAY since Jan 2014 chart from Bloomberg[/caption]

These charts are nearly identical.

I have no idea what this company will report, and how investors will react. The stock is obviously priced for perfection, as WDAY was, but a beat and raise could cause a fairly epic breakout.

Potential Trades:  Depending upon your directional inclination, this is how we would play:

Bullish:  SPLK ($69.75) Buy May29th weekly 70 / 76/ 83 call fly for ~$1.35

Break-Even on Tomorrow’s Close:

Gains: between 71.35 and 81.65 make up to 4.65, with max gain of 4.65 at 76

Losses: up to 1.35 between 70 and 71.35 & between 81.65 and 83 with max loss of 1.35 below 70 or above 83

Rationale: Playing for a breakout in line with the implied move is tricky business in a high vol stock like this into an event. This trade structure helps mitigate the vol crush post the event and breakeven is only 2% higher in the stock.


Bearish:  SPLK ($69.75) Buy June 67.50 / 60/ 52.50 put fly for ~$1.50

Break-Even on June expiration:

Gains: between 66 and 54 make up to 6, with max gain of 6 at 60

Losses: up to 1.50 between 67.50 and 66 & between 52.50 and 54 with max loss of 1.50 below 52.50 or above 67.50

Rationale: If the stock gets hit and is unable to hold its rising 50 day moving average the next stop is likely the rising 200 day moving average around $60. The stock would likely find support there. This trade targets that area ($60) as its max potential gain. This isn’t a terrible hedge against a long either, risking less than 2%, but it’s not disaster protection by any means.




Original Post May 14th: Name That Trade – Uptown Splunk $SPLK

My friend Jonas Lamis, who is the CEO of Sensai, a big data software company that helps other companies find insights in unusual data sets, hit me on Twitter yesterday:

Obviously this is just one piece of data, with an apparent positive implication for the stock, but it got me looking at the stock. Splunk is an enterprise software vendor whose products analyze big data. The company has over 9,000 customers, and while earnings have been hard to come by, sales are growing 30% a year and are expected to be $600 million in the current fiscal year. At 15x expected sales, the stock is far from cheap. But the words big data are worth a few multiple points along 🙂

If you think the stock is expensive on most valuation metrics, its important to note that while the stock is up 20% in 2015, it is still down 33% from its all time highs made in early 2014 when it appeared to be an all out mania.

SPLK 2yr chart from Bloomberg
SPLK 2yr chart from Bloomberg

On a one year basis, the stock has held its uptrend since the 52 week lows, and is now threatening a breakout above key technical resistance at $70:

SPLK 1yr chart from Bloomberg
SPLK 1yr chart from Bloomberg

Splunk does not report fiscal Q1 results until May 28th, and the May 29th weekly 70 straddle (stock reference $70.30) can be bought for about $6.70. If you bought that today you would need a move above $76.70 or below $63.70 to make money, or about 10%. That seems a bit hefty, but the stock has had 4 moves this year inside of a month of at least 15%:

SPLK 1yr chart from Bloomberg
SPLK 1yr chart from Bloomberg

While short dated options prices look expensive, given the stock’s recent movement, and the scheduled event, they could actually be viewed as cheap for those looking to express directional views.

We will be sure to check back in on this one prior to earnings.