Salesforce (NYSE: CRM) Set to Open 13% Higher on Earnings Beat

A good week got even better for Salesforce NYSE: CRM shareholders.

Shares jumped nearly 4% on 4x average volume during Tuesday’s trading session on news that the cloud-based software company would be added to the Dow.

And now, shares are set to open more than 13% higher today, after the company’s Q2 numbers beat analyst expectations.

Salesforce shares will set fresh all-time highs today at the open – and this is coming right after CRM set all-time highs yesterday on the Dow news.

So are shares too extended? Or does Salesforce still have a lot more room to run?

Growth Shows No Signs of Slowing Down

Salesforce has a history of beating analyst expectations, having done so over the last 10 consecutive quarters.

So the whisper numbers were likely higher than the published estimates.

But nevertheless, investors were apparently not expecting results to be as good as they were.

Salesforce’s revenue grew 29% yoy to $5.15 billion, beating estimates by $250 million. And earnings came in at 86 cents a share, excluding a 58-cent gain from investments. Analysts were expecting 67 cents a share.

The company issued the following guidance for Q3:

• $5.24 billion to $5.25 billion in revenue compared to estimates of $5.01 billion.
• 73 to 74 cents in earnings compared to estimates of 77 cents.

The earnings guidance is one of the few bones to pick with the earnings release. But investors shrugged it off, and rightfully so – revenue is more important than earnings for CRM at this stage. Salesforce is trading at around 82x forward earnings.

CRM shares aren’t changing hands at current prices because of this year’s earnings. They are at this level because revenue growth is expected to be high for the foreseeable future. Eventually a day of reckoning will come, and earnings will have to be high enough to justify Salesforce’s valuation. But that day likely won’t come for at least a couple of years.

Salesforce is a Pandemic Winner

On the Q2 earnings call, Chief Revenue Officer Gavin Patterson said, “Companies realized they couldn’t put off major technology upgrades. They had to make decisions that would take weeks or months, in days.”

President and COO Bret Taylor detailed why Salesforce clients were able to pivot quickly when the pandemic hit, saying, “What really differentiates Salesforce broadly is we have these low-code values, where you don’t need to be a professional developer to set up Salesforce."

One example cited was the ability to use Salesforce’s tools to quickly build out curbside pickup options, a huge (and urgent) need for thousands of retailers and restaurants.

The Work.com and Salesforce Anywhere products are two more ways that CRM has helped customers through the pandemic. Work.com helps clients safely reopen offices and has been used by governments and schools to do contact tracing and manage employee shifts. Salesforce Anywhere has helped clients seamlessly move to work-at-home models.

Wait for Attractive Entry Point

Salesforce was already approaching overbought territory on the RSI prior to today. After the open, shares will certainly break above that threshold.

But even though shares are overbought in the near-term, they aren’t too extended in the long-term.

CRM was trading just above pre-pandemic levels prior to today. Not bad for a pandemic winner.

But you’re probably wondering:

How do I play CRM after today’s open?

I wouldn’t buy it today. Instead, you should look for a ~2 week consolidation around today’s open, followed by a convincing breakout. That would create a bullish flag pattern, one of the most dynamic chart set-ups that exist.

CRM is Growth Machine With Lofty Valuation

In addition to trading at around 82x forward earnings, CRM is trading at just under 11x forward sales.

These multiples are steep, but consider that:

• CRM should record high growth over the next few years, and perhaps beyond.
• Earnings as a percentage of revenue should increase over time.
• The company has a proven ability to prosper in a range of environments.

If the bullish flag pattern materializes, look to get into CRM. Just make sure you place a stop-order within 10% of your purchase price. This way, you can expose yourself to the company’s high upside, while limiting your downside.