Fast-Breaking Trade on One of Tech’s Most Explosive Stocks

By Stephen Guilfoyle

Did you happen to noticed the oddity of Splunk's (SPLK) performance last Friday?

I'm flat this name gang, despite my fondness for the cloud. I remain long Adobe (ADBE) , and Salesforce (CRM) as well as Microsoft (MSFT), and Amazon (AMZN) for their innovation in the space and for their leadership.

Splunk gave up 5.2% on Friday to close at 110.26 in response to first quarter earnings that hit the tape on Thursday afternoon. The firm beat expectations for both EPS (still negative), and revenue where they also raised full year guidance. So… where's the beef? Operating margins were still negative, but better than they were a year ago, so that's not it. Billings. I'm told that was the problem. Growth in billings slowed significantly due to new guidelines on when billings are recorded.

In what might be considered a paradox considering how the share price fared on Friday, multiple analysts increased their target prices for this name into the mid to high 120's. Maybe I buy some equity… small, but that's not really the play.

So, now Splunk… You have my attention. Where is my point of entry? Do I even want to enter? The shares at this lower price still trade at 75 times forward looking earnings. There certainly is risk. Operating margins need to catch up to gross profit margins. Debt, thankfully is not an overwhelming problem.

The bottom line is that this is a growth story. A sustained growth story. Three year earnings per share growth rates stand at 66%, and three year revenue growth stands at 39%. Both of these rates are lofty, yet both are showing some signs of slowing down a bit. It's plain for us to see that support in May, and resistance in March were both found at the 110 level. Yet in order to take on the risk, I think I need a larger discount. April resistance showed up at 108, and the 50 day simple moving average closed on Friday at 106.31. Perhaps somewhere in there is where I will find my risk/reward proposition more adequate.

The Idea

A sale of 107 Splunk puts expiring this Friday (just four days away) still paid 80 cents on Friday night. If one dares, one could push out expiration another two weeks to the fifteenth, and get paid, as of Friday more than $2 to do so. That way, even if forced to eat the shares, the trader's net basis is below 105.

The timid (no offense, this is how you turn a buck at significantly reduced risk of injury.) could look at June 15 $100 puts. Those went out at 62 cents.

Full story by Stephen Guilfoyle at The Street