Why Has Splunk Stock Dropped So Much?

Following the announcement that CEO Doug Merritt would be stepping down on Monday, shares in data software firm Splunk Inc. (NASDAQ: SPLK) dropped by over 18%. This dip was the worst decline for the company in almost a year.

Merritt, Splunk's CEO for the past six years, will be replaced by board chair Graham Smith on an interim basis. The company is now actively seeking a new permanent CEO to take the reins. Following this news, should investors be worried?

Why does this matter to investors?

Splunk stock had been rising relatively steadily for the past six months, so this sudden drop represents a drastic change in fortunes for the company. Having already lost chief technology officer Tim Tully and president of worldwide field operations Susan St. Leger earlier in the year, this unexpected resignation has catapulted the company to the forefront of many investors' lists of concerning companies. 

Splunk is already fighting on multiple fronts, with increased competition in the cloud space already cause for investor apprehension. Added to this, questions linger about the company's changing business model from certain Wall Street analysts. Under Merritt, the firm looked to transition to cloud-based services. This has seen a spike in quarterly cloud revenue of 73% year-over-year (YoY), but overall company growth has failed to match that of the S&P 500 index.

So should I buy Splunk stock?

Investors who are exceptionally bullish on Splunk may see this as an opportune time to buy the dip, however, for most people, these latest developments will be cause for caution. The company is dealing with a lot of complicated issues right now, compounded by the sudden loss of its CEO. Until the business can show strong signs of stability moving forward, investors might be wise to steer clear.

Investors will want to see the continued growth of the cloud division, along with improved operating margins and overall revenue (both of which have dipped throughout Merritt's tenure). The company was undoubtedly hurt by the global COVID-19 pandemic, but signs of life still need to be seen as we transition into a post-pandemic world. The Q4 earnings report will offer a good insight into how the company has managed this turbulent period, but the real answers will come in the first half of 2022 as Splunk looks to leave the latter part of this year behind it.

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