For his first Executive Decision segment of "Mad Money" Tuesday, Jim Cramer sat down with Doug Merritt, president and CEO of Splunk Inc. (SPLK) , a cloud analytics company that just posted an earnings beat.
Merritt responded to investor concerns about the company's cash flow by reminding them that Splunk is converting from perpetual to subscription-based licensing. Consequently, its cash flow will be lower in the short term as only a portion of contracts can now be recognized immediately. Over the long term, however, Splunk will follow in the footsteps of Adobe Inc. (ADBE) and other cloud software providers that have made similar transitions.
When asked about Splunk's growth rate, Merritt said Splunk is among the fastest-growing software companies in history thanks to a growing market and a growing product portfolio that has increased to more than 10 products today. Merritt added that customers stick with Splunk because it offers mission-critical services and monitoring. Customers often start with just one area and expand into others over time.
All that sounds rosy, but the most up-to-date information we have is the price of the stock.
We looked at the charts of Splunk last week and they looked vulnerable. Let's see if anything has changed.
In this daily bar chart of SPLK, below, we can see that prices are now below the declining 50-day moving average line and the cresting 200-day line. Trading volume has increased on the decline, suggesting that sellers are anxious to reduce positions. The daily On-Balance-Volume (OBV) line shows a decline from May, signaling more aggressive selling. The Moving Average Convergence Divergence (MACD) oscillator has moved below the zero line for an outright sell signal.
In this weekly bar chart of SPLK, below, we can see that this is the second week for prices below the 40-week moving average line. The weekly OBV line is pointing down and the MACD oscillator is closer to the zero line.
In this weekly Point and Figure chart of SPLK, below, we can see a potential downside price target in the low $90s.
Bottom line strategy: SPLK is in a position to test and probably break the early June low. A break of this low is likely to precipitate further declines and a test of the December low around $90. Get defensive.