Salesforce (NYSE:CRM) stock continues to remain in place amid company growth and acquisitions. It began the year with a quick recovery from the fall 2018 bear market in tech stocks. However, after returning to levels near the 2018 highs, Salesforce stagnated. As a result, it has traded in a range for most of the year.
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However, valuations remain elevated even as profit growth hits a temporary slowdown. Moreover, other companies have entered the software-as-a-service business. CRM stock should return to double-digit growth in the near future. However, with the company maturing and choices for SaaS increasing, I see little incentive for investors to take the multiple, and by extension, the stock price to higher levels.
At a forward price-to-earnings ratio of 56, CRM stock remains overvalued. However, unlike other value-rich stocks such as Twilio (NYSE:TWLO) or Shopify (NYSE:SHOP), it lacks one critical element of this type of equity — movement. CRM stock trades at about the same level as it did in early February.
This is not to say I have gone negative on CRM stock. Salesforce pioneered the SaaS industry as founder Marc Benioff left Oracle (NYSE:ORCL) and founded this company. As a result, the firm is a “force” not just in sales, but across the entire tech industry. Hence, its high valuations of the recent past are not hard to understand.
CRM Faces Multiple Compression
However, at $140 billion, Salesforce has grown well beyond the startup phase. This has begun to evolve into a mature company. Over the long run, I also expect valuations to “mature.” As I pointed out during the summer, CRM stock moved little despite buying Tableau and forming a partnership with Alibaba (NYSE:BABA).
Increased competition has become an increasingly important factor in the company’s valuation. Justifying a 100-plus P/E ratio is one thing when a company holds a virtual monopoly. However, consumers now have alternatives. Peers such as Oracle, Microsoft (NASDAQ:MSFT) and Adobe (NASDAQ:ADBE) have become competitive threats. All of these companies also trade at a lower multiple.
I would not expect this process to play out quickly. Thus, I agree with InvestorPlace’s Thomas Niel when he recommends against shorting CRM stock. Profit growth may have fallen into the single digits. Still, when analysts predict that a profitable company will increase revenues by 27% in the current year and 24.1% the next, it typically makes for a weak short candidate. Regardless of where CRM stock moves, I expect Salesforce to continue to prosper as a company.
Also, the CRM stock price has twice bounced back from the low $140 range. Despite my “overvaluation” assertion, it will need more than a high P/E ratio to inspire a massive downward catalyst. Unless we see an overall bear market that compares to the one in the fall of 2018, I do not expect a significant selloff in Salesforce stock.
However, those who ride out the maturing process will see CRM stock either stagnate or decline as the process of multiple compression plays out. Investors need to ask themselves if they want to stick around for this.
My Concluding Thoughts on CRM Stock
Despite the bright future for Salesforce as a company, falling multiples and increased competition could hold CRM stock over the near term. Despite a temporary slowdown in profit growth, CRM’s forward P/E ratio remains over 50. This has occurred in an environment of rising competition and slow maturation.
To be sure, CRM stock remains a long-term winner. I think once valuations fall, Salesforce stock will again become a buy. However, until the P/E ratio compares well to its main peers, I see CRM remaining in its current range for the foreseeable future.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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