Salesforce CRM is releasing earnings after market close today and expectations are high. Salesforce has beaten EPS estimates the last 4 quarters by high double-digit percentages. CRM is expected to report record high revenues and EPS as the firm continues its extraordinarily consistent top-line expansion.
CRM is a big mover on earnings releases, with the key catalyst to these moves being management's guidance. Salesforce beat earnings last quarter but its stock traded down almost 5%. This was a result of EPS guidance being slightly lower than analysts' estimates for the year, although revenue guidance was higher.
CRM on average has beaten earnings by about 40%, but take that percentage with a grain of salt considering that its EPS had been towing the line of profitability for a while.
CRM analysts have been adjusting their earnings estimates down marginally since the last earnings release. Conservative outlooks are always better for investors going into earnings but look to see if these adjustments continue after earnings are released this evening.
Salesforce is a customer relationship management (CRM) company that’s revenue is driven by cloud powered subscriptions and services used by businesses to store, organize, and analyze data. Their top-line is split up into 4 different segments, Sales Cloud, Service Cloud, Marketing & Commerce Cloud, and the Salesforce Platform/Other.
Salesforce has more than doubled its revenue over the past 3 years. In the same time frame, they went from barely profitable to generating $1.1 billion in annually income. CRM was able to exceed $13 billion in sales faster than any other enterprise software company in history. According to management, Salesforce is on track to double revenue again over the next 4 years.
Salesforce works with over 150,000 businesses from Wall Street to Main Street. 99 of the Fortune 100 companies are partnered with Salesforce, the leader in CRM technology.
Competition is steep in this industry, with competitors like Oracle ORCL, SAP SAP, Adobe ADBE and Microsoft MSFT all fighting for market share. Below you can see MSFT (orange) and Adobe (green) have outperformed the market year-to-date, while CRM (blue) has been lagging. CRM’s underperformance could be a function of negative sentiment going into its Q1 earnings, possibly giving this stock a greater upside potential.
Salesforce is expected to grow its top-line over 20% for the next 2 consecutive years. CRM isn’t cheap, trading at a forward PEG of 2.3x which is above the industry average of 2.1x and the market average of 1.7x. CRM is trading below its 5-year median PEG though. I use PEG to add the additional growth metric into the traditional P/E multiple, which is crucial when valuing a fast growing firm like Salesforce.
This slightly high valuation doesn’t mean that CRM isn’t a buy. Amazon AMZN was trading at a PEG far above the industry average until the last couple months and AMZN has been able to produced prolific returns for investors.
Over the past 3 days of trading CRM has slid 7.5%. Over the past month insiders at Salesforce seem to be selling out of CRM almost every day. This could be a sign of soft earnings results to come. Regardless, I would hold out on putting a position on CRM until Q1 results are released this evening. If you are already holding CRM I don’t see a reason to sell especially considering how far the stock has already fallen, an earnings miss might already be priced in.
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