3 Tech Stocks That Crashed This Week

Last week was not only a short one, but also a decidedly undramatic period in market history. The S&P 500 index gained a modest 1.2% in three small climbs with a minuscule drop in the middle. The tech-heavy Nasdaq Composite gained 1.3%, almost all of it happening on the Tuesday after Memorial Day.

But some investors will remember this week more than others, and not always fondly. Here are three tech stocks that took a serious beating last week.

Company

Drop From Weekly Highs

CAPS Rating (out of 5)

Splunk (NASDAQ: SPLK  )

17.5%

**

3D Systems (NYSE: DDD  )

11.1%

****

Tableau Software (NYSE: DATA  )

9.8%

***

Tableau Software came into the week on a sugar high, riding buyout rumors from last week. Even Jim Cramer threw kerosene on the fire, saying that the stock suddenly looked attractive to potential buyers, now that its share prices had fallen to a reasonable level.

But nothing seems to be happening. Instead, head-to-head data analysis rival TIBCO Software (NASDAQ: TIBX  ) started rising on its own set of buyout chatter, and the air started leaking out of Tableau's takeover-inflated balloon. Investors lost patience slowly until the bottom dropped out with a 5.6% plunge on average volumes in the Friday session.

As a TIBCO investor myself, I don't see much value in that buyout talk either. The company makes a point of its independence, and would lose a selling argument if a larger multi-industry player owned it. Tableau is attempting to copy that distinction, but is far from becoming "the Switzerland of the data center," as CEO Vivek Ranadive likes to describe TIBCO.

So Tableau is the more credible buyout target here, but only if low share prices really do work out as a big bidding incentive. And it really doesn't.

Consider this:

  • Tableau traded over $100 per share as recently as late February.

  • $58 per share sure is a lot cheaper, but ...

  • I dare you to find a shareholder that would accept an opportunistic bid below such recent high-water marks.

In short, any bid that tries to take advantage of Tableau's depressed pricing would be rejected by shareholders, hands down. The company could be bought, but only at prices palatable to Tableau's current owners. Low pricing becomes a selling point only if the stock stays low for a considerable time, and two months hardly counts.

Come back in a year or so, and see if this stock still looks like a buyout target. In the meantime, keep an eye on Tableau's microscopic 2% profit margins and dazzling revenue growth -- 86% year over year at this point. Changing one or both of these metrics could have enormous effects on Tableau's share prices.

Will 3-D printers ever become as commonplace as refrigerators or dishwashers? 3D Systems sure hopes so.

Diluting the future
Three-dimensional printing specialist 3D Systems took its bitter pill early. After an uneventful Tuesday session, the stock plunged to close 11% lower on Wednesday.

That's because the company just announced a large secondary share sale. 3D Systems is selling a fresh batch of 6 million new shares, with another 0.9 million available as overallotments to the deal's underwriters.

The sale will more than double 3D Systems' cash balance while keeping the balance sheet nearly debt-free. It's unclear exactly what the company plans to to with this large helping of shareholder-based funding, but smallish cash-based acquisitions seem likely.

But avoiding debt by asking shareholders for more money has its drawbacks, too. In this case, the offering dilutes your current 3D Systems holdings by between 5.7% and 6.6%, depending on whether underwriters want to buy extra shares.

You'll note that the stock fell much further than 6.6%. Investors aren't sure that this dilutive cash grab is worth anything to today's shareholders, and many are voting with their feet and wallets.

The stock is sitting far below 52-week highs but still trades at nosebleed valuations on traditional metrics. For example, 3D Systems shares are available for 9.5 times trailing sales or 120 times trailing earnings. The stock even looks expensive if you factor in growth potential, with a PEG ratio just south of 3.0. As a reminder, this metric weighs P/E ratios against analysts' earnings growth projections, and anything below 1.0 points to a potentially undervalued stock.

But if 3-D printing truly is the future, there could be a big payoff beyond the range of analyst forecasts -- and it looks like a doozy. Buying 3D Systems on large drops, like the one we saw this week, isn't a crazy idea at all. In fact, I'm starting a bullish CAPScall on 3D Systems right now, to take advantage of a large temporary discount.

Could the stock drop even further? Sure, but I don't play market timing games. And I believe that 3-D printing will mature to the point that it changes our daily lives. Let's see if 3D Systems can remain a leader when the market truly explodes.

Source: Splunk.

Splunk? Splat!
And then there's machine-generated data analyzer Splunk. The company sailed along peacefully until Thursday night, when Splunk released first-quarter results. The next day, shares plunged 16% on massive volume. The stock set fresh 52-week lows during the Friday trading session.

Here's the irony of Splunk's crunch: That quarterly report was actually surprisingly good.

Splunk beat analyst estimates on both the top and bottom lines, and followed up with a modest raise of full-year revenue guidance.

The only reasonable explanation for this sudden drop would be that investors were hoping for a bigger guidance boost. Or perhaps a larger earnings surprise. Yeah, I know. It's hard to write these explanations with a straight face, but it's really all I've got.

Basically, Splunk investors wanted more assurance that the high-growth gravy train will continue to run. The revenue guidance increase was nice, but not assertive enough. That's what you get when your financial trends look like this:

SPLK Revenue (TTM) Chart

SPLK Revenue (TTM) data by YCharts

That's an 841% free cash flow boost (also known as more than a nine-bagger) on 174% higher sales, all in just two and a half years.

Splunk is the walking definition of a momentum stock right now, and there just wasn't enough energy behind the latest report to keep the ball rolling.

Investing in story stocks where financial metrics simply don't apply to their current trajectory is not easy. I would only recommend it if you have deep insight into where the company is going, and why the high growth phase won't peter out in a cash-burning whimper. Big Data analysis is certainly a megatrend, especially when you focus on Internet of Things data like Splunk does. But I'm not convinced that the company can address this niche better than other data analysts, like TIBCO or Tableau, just for starters.

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