- Salesforce.com’s slowing growth is priced Into the market
- Company lowered its guidance for revenue due to FX headwinds
- Stock trades at a high 34X its earnings which is double the average S&P 500
Salesforce.com (NYSE:CRM) had a great quarter and is on track to continue growing strongly at scale, but there are several factors that we think will keep the price action from rebounding very strongly.
The bottom line is this highly-valued company’s growth is not only slowing, but comps are becoming increasingly difficult and there are no capital returns to lure new investors to the table.
The stock trades at a high 34X its earnings which is double the average S&P 500 and the average S&P 500 company pays a dividend and buys back shares.
In this scenario, we see the downtrend in Salesforce.com ending and a new trading range emerging.
Salesforce.com Beats The Consensus But…
Salesforce.com had a fantastic quarter and beat the Marketbeat.com consensus figures for Q1 results, but the results and guidance are not that impressive relative to the consensus.
The company reported $7.41 billion in net revenue for a gain of 24.3% over last year. The growth is great, but down from higher levels in the preceding two quarters and only beat consensus by 40 basis points.
The strength was driven by a 24% gain in the core Subscription and Service segment and compounded by a 30% gain in the much smaller Pro segment.
Moving down to the income, the margins came in favorably with both the GAAP and adjusted operating margin above expectations. The bad news is that an adjusted margin of 17.6% led to $0.98 in adjusted earnings which is down $0.23 from last year and the guidance isn’t any better.
The company lowered its guidance for revenue due to FX headwinds but raised its outlook for margin. The bad news here is that Q2 revenue and earnings are both expected to be below the consensus and for strength to build in the second half.
The second half guidance assumes a marked improvement in both revenue and earnings and even here the news is mixed. The revenue guidance of $31.8 to $32.06 billion is below the market's expectation and there is risk in the earnings outlook.
The range for earnings guidance is a dime above the consensus but flat to down from last year despite top-line growth and it assumes the company can control inflationary pressures.
The Analysts Lower Their Price Targets For Salesforce.com
The 40 analysts rating Salesforce.com have it pegged at a firm Buy and that has been steady over the past year but the price target is falling. There have been at least 9 major sell-side analysts out with commentary since the earnings release and none of the news is good in terms of the price target.
While 2 of the 9 raised their price target, all 9 of the new targets are below the current Marketbeat.com consensus price target and we see the consensus moving even lower.
As it is, the consensus is down sharply in the 90 and 30-day comparisons and capping upside potential in the stock.
The Technical Outlook: Salesforce.com Pops On Results
Salesforce.com shares popped more than 10% on the earnings news and guidance, but we are not buying into the move yet. The gain suggests a bottom is in play, but it is far too early to call it a bottom yet.
Price action is still well below the 150-day EMA, near $200, and a strong resistance target at $195. If the market can follow through on Wednesday's pre-market jump, the next hurdles will be at those levels.
A failure to move above either will most likely cap gains and keep the stock moving sideways until late in the summer and there is a possibility the market will move down to retest support as well.
