Investors Continue to Overpay for Splunk Inc (SPLK)

Even though analysts still expect higher revenue growth from Palo Alto Networks Inc (NYSE:PANW) of 54% this year, the stock has plunged from a high of $72 back September last year to only $44 today. The company had similar outlandish multiples as Splunk Inc (NASDAQ:SPLK) until the market became more discerning regarding the valuation of this stock. Palo Alto Networks Inc (NYSE:PANW) now has a revenue multiple of nearly half that of Splunk even with faster growth.

Tableau Software, Inc. (NYSE:DATA) is another example of how a recent IPO is able to maintain lofty valuations for now. Even in this case, the stock only trades at a valuation of 11 times revenue expectations for this year. This after the stock priced at $24.50 and soared to around $50 now.

In addition, Tableau Software, Inc. (NYSE:DATA) reported 60% revenue growth in the March quarter prior to going public. If the company has faster growth, it doesn’t appear rationale that Splunk should hold a loftier valuation multiple.

Bottom line

Splunk highlights the difference between a company and a stock. It might be one of the best-run companies around with fast growth for the next decade. The stock though already has factored in that growth ensuring the next couple of years will likely generate lackluster returns for investors.

Even compared to other hot technology stocks over the last couple of years, Splunk trades at an extremely lofty valuation. Any company that creates a platform to handle and analyze the massive amounts of data generated these days will have a strong future, but investors always need to be careful to not overpay. The current price of Splunk suggests investors are overpaying even as revenue is decelerating at a significant rate over the next couple of quarters.

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Investors Continue to Overpay for Splunk originally appeared on Fool.com is written by Mark Holder.

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