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Salesforce Stock Is a Promising Buy Ahead of Earnings

Ian Bezek

Salesforce (NYSE:CRM) stock has enjoyed a strong recovery in recent weeks. The Software-as-a-Service giant saw its shares tumble from $195 to $115 during the March crash, but has rallied back above $170 now. Investors have shrugged off a slowdown in revenues at many internet companies — in particular ones exposed to advertising — by instead focusing on how the stay-at-home orders will speed the transition toward a digital-first economy.

CRM Stock Is a Promising Buy Ahead Of Earnings

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Specifically, Salesforce is likely to see a short-term slowdown in billings thanks to the virus. But the crisis may force a lot of previously offline companies to start using digital software to manage their sales channels; Salesforce could end up gaining from this in the long-term.

Earnings On Deck

In any case, traders are wondering what will happen next, as Salesforce is set to report earnings next week. As of last quarter, it appeared Salesforce was experiencing accelerating growth. We can say that because while Salesforce grew revenues 29% for the full year, it saw revenues spike 35% higher last quarter. It was on an upward trajectory until the virus hit.

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Now, however, several analysts have cut estimates for Salesforce, and other related companies such as Workday (NASDAQ:WDAY) on the expectation of a significant slowdown in revenue growth. Earnings reports from firms such as IBM (NYSE:IBM) have shown weakness in areas that could filter through to Salesforce as well. All in all, traders probably shouldn’t expect a fantastic quarter, nor great guidance for the rest of the year either. But the market seems willing to discount 2020 and look to the future.

Salesforce Is Still Finding New Customers

There has been some concern about Salesforce’s outlook in the near future. Surely with the economy in a slowdown, people will need less sales software, right? However, the good news is that Salesforce’s core functionality can be used for other tracking and monitoring applications outside of the sales function.

For example, Salesforce has its Salesforce Cares program, specifically tailored to helping companies manage health and human resources during the Covid-19 crisis. As of April 30, more than 7,000 firms had signed up for Salesforce Cares. Clients include tele-health firms, medical clinics, apartment property managers and insurance benefits providers among others. This shows the wide range of applications that Salesforce can support beyond its traditional core capabilities.

Salesforce’s Valuation: Fairly Priced

If you look at Salesforce on a pure earnings basis, the stock usually tends to look expensive. Next year, for example, consensus estimates have Salesforce earning just shy of $4 per share. That would put the stock at more than 40x forward earnings. However, keep in mind that Salesforce tends to plow its earnings back into the business via marketing spend. In doing so, it gives up accounting profits now in return for far larger revenues and cash flows in the future.

Thus, the most reliable way to judge Salesforce’s stock is by its price-to-sales ratio. Coming out of the financial crisis, CRM stock sold for just 4x sales — a veritable bargain. It shot up to 11x revenues in 2011-12, and became somewhat overpriced for a time.

Since 2013, however, the stock has settled into a remarkably consistent range, with Salesforce almost always being worth between 7x and 9x sales. Any dips to 7x or below have been strong buying opportunities. Meanwhile, when it has gotten up above 9x — such as late last year — it was a good time to take some profits. The stock is now selling at 8.5x sales, which puts it within the normal range; a correction that knocked the stock down 10% from here would move it toward a compelling buying point. But the current price isn’t half bad, either.


The Verdict on CRM Stock

In one sense, Salesforce’s short-term trading fate will ride with the broader cloud and SaaS stocks. Salesforce is one of the big players in the sector, and its stock is approaching key resistance levels. Whether or not it surges to new heights next week will have as much to do with tech stock sentiment as anything else.

That said, Salesforce could surprise some investors with this next earnings report. Sure, there’s probably going to be a slowdown in growth from their existing customers. And margins may suffer in the short-run. Salesforce is run with long-term objectives in mind; CEO Marc Benioff promised not to lay off any significant number of workers during the acute phase of this crisis, for example, which is great for long-term loyalty but could have an effect on margins in the short-term.

However, if you own Salesforce as a long-term investment, part of what you’ve signed up for is maximizing future value rather than shooting for immediate profits. So don’t worry about this one earnings report too much. That said, it could come in with more positive news than you expect. That’s especially true when you consider all that’s going on with Salesforce’s efforts in fostering more client relationships in telemedicine and other adjacent lines of business. Salesforce is one of the core blue chip companies within the cloud software universe. As such, CRM stock represents a decent value heading into earnings.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.

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