By Chris Lau for Kapitall. “Momos,” or momentum plays, are having a rocky time these days. After peaking in March, 2014, many former momentum stocks sold off. Splunk (SPLK) is a case study in sell-off logic. The application software maker peaked at $106.15 and fell steadily since then. After the stock tried to rally back to $50, it sold off again, dropping 16 percent in a single day. When a stock falls by such a large amount, it is a good time to look at it as an opportunity. Splunk outlook negative Splunk, which makes tools to help enterprises analyze and visualize data, fell simply because its P/E (price to earnings) valuation is in the triple digits. Investors priced in strong future earnings, but Splunk said revenue growth will fall. The firm forecast revenue from licenses will drop from 42% in fiscal Q1 to no more than 35%. Despite the lower growth, Splunk’s revenue forecast of $92 million to $94 million for Q2 was above consensus ($91.6 million). For the fiscal year, Splunk expects operating margin will be zero. In Q1, operating margin was hurt by higher costs in R&D, G&A, and in sales and marketing. Investors are fretting over the higher costs accompanying sales growth. By selling off shares, investors are adjusting for lower future negative profitability ahead. Some “momos” in the 3D printing space are faring no better. 3D Systems (DDD) raised valuation concerns after it issued a stock offering that would dilute shareholders by 5.8%. In the past, the firm grew revenue by acquiring companies. In theory, the share issuance should benefit shareholders if its future acquisitions support continued growth. More importantly, the company, and Stratasys (SSYS) need to get bigger to build a wider moat. Bigger firms like Hewlett Packard (HPQ) could disrupt the market and threaten the niche players. Bottom line Splunk and 3D Systems are only two examples of momentum stocks that lost bullish investors. Future growth for these companies could slow, relative to their past growth rates. This is due to growing competition, as more players enter the market. At some point, the stocks will stop selling off, but in the meantime, investors should add these two companies to their watch list.
Do you think these momentum plays have more mojo in the tank? Use the links below to begin your own analysis.Click on the interactive chart to view data over time. 1. 3D Systems Corp. ( DDD, Earnings, Analysts, Financials): Engages in the design, development, manufacture, marketing, and servicing of 3D printers and related products, print materials, and services. Market cap at $7.83B, most recent closing price at $76.39. 2. Hewlett-Packard Company ( HPQ, Earnings, Analysts, Financials): Hewlett-Packard Company offers various products, technologies, software, solutions, and services to individual consumers and small- and medium-sized businesses (SMBs), as well as to the government, health, and education sectors worldwide. Market cap at $57.06B, most recent closing price at $29.92. 3. Splunk, Inc. ( SPLK, Earnings, Analysts, Financials): provides software solutions that provide real-time operational intelligence and Splunk Enterprise, a machine data engine with collection, indexing, search, reporting analysis, and data management capabilities. Market cap at $9.62B, most recent closing price at $90.75. 4. Stratasys Inc. ( SSYS, Earnings, Analysts, Financials): Engages in the development, manufacture, and marketing of three dimensional (3D) printing, rapid prototyping (RP), and direct digital manufacturing (DDM) systems primarily in North America, Europe, and the Asia Pacific. Market cap at $5.26B, most recent closing price at $125.31. Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.