A Reality Check For Salesforce Investors

Salesforce.com (CRM) reported earnings this morning and shares are tumbling. The company reported a strong 33% topline growth for the 3rd quarter and provided robust guidance yet not quite good enough for investors. What we have is a classic case of unfulfilled expectations in an overexuberant market. Based on the outlook for Salesforce.com today’s sell-off is tomorrow’s opportunity.

Despite the disappointment, a case of overzealous investors and not poor company performance, Salesforce.com is on track to meet or exceed the current consensus outlook. With an expected 20% compound annual growth rate over the next 4 years, the third-quarter results and outlook for the 4th were already factored into the price. That’s why shares are tumbling now.

Salesfore.com Is Growing At Full-Speed

The third-quarter numbers were all good, nothing for anyone to be disappointed with there, revenue grew 33% with high double-digit growth in both of the company’s core segments. Subscription and Support revenue grew 34% while Professional Services expanded by only 22% but sluggishness in Professional is not to be worried about. Professional Services is the smaller of the two segments and only 6.10% of net revenue.

Adjusted EPS came in at $0.75 and beat consensus by nearly a dime. The same is true of GAAP EPS, beating by a dime, although the company posted a net loss for the quarter. Loss aside, cash from operations increased more than 105% YOY and contributed to the company’s $6.53 billion cash hoard.

The cash is slated for growth and acquisitions so the 20% CAGR outlook is not too-far-fetched. The company already has a history of successful acquisitional growth, the most recent purchase was ClickSoftware earlier this year, so there is no reason to doubt management’s ability to execute. That deal was worth $1.35 billion and expected to help the company compete with Microsoft for field-services. The deal is also opening doors to new clients, among ClickSoftware’s clients are Bosch and Vodafone.

Tableau was also acquired by Salesforce.com this year. That deal is valued at over $15 billion and the largest by the company to date. Tableau is a data-visualization software company out of Seattle. The Tableau software allows clients to visualize data from wherever it is stored and a complement to Salesforce.com’s existing infrastructure.

The Guidance Is Mixed

While a company’s current earnings are an important driver of price action it is the outlook for future earnings that really gets the market’s attention. Salesforce.com got investor attention this morning when management issued the first guidance for the fiscal 4th quarter of 2020. The company is expecting revenue in the range of $4.75 billion which is slightly above consensus.

The problem for investors is that earnings are not going to increase in lock-step with revenue. EPS is projected in the range of $0.55 which is well below the consensus. What makes the matter more confusing is the outlook for full-year fiscal 2020 revenue and earnings. Salesforce.com reiterated its outlook for revenue but upped the range for EPS revealing underlying volatility in profit margins.

The Technical Outlook; An Opportunity In The Making

With a 20% CAGR in the forecast for the next four years, the long-term technical outlook is bullish. What the CAGR doesn’t guarantee is that prices for the stock will move up in a straight line, or volatility in the quarter to quarter performance won’t produce sell-offs. In this light, sell-offs such as the one sparked by the 3Q fiscal 2020 earnings report are better viewed as buying opportunities than times to take profit.

In the nearer-term, investors are cautioned not to enter too soon or too aggressively. Today’s action broke the 30-day exponential moving average and helps confirm a price reversal at the top of a trading range. Because the outlook for Q4 earnings is weak and economic activity remains sluggish there is a chance SalesForce.com stock could retreat over the next 4 to 12 weeks. The most likely points of support are at $156, $152 and $144 levels.