Salesforce.com Is More Attractive After 10% Discount

Salesforce.com Falls On Weak Guidance, Slowing Growth 

Salesforce.com NYSE: CRM is one of the best-positioned tech company’s working on the Internet today. The company is not only the leader but the very creator of Customer Relationship Management and is still growing at a high double-digit rate now, more than 20 years after its founding. The bad news is that growth is slowing and causing a bit of tarnish to form on what is otherwise a high-quality investment. The takeaway for us is that growth remains strong and is expected to remain strong for the foreseeable future. In that light, the 10% decline in share prices is an unwelcome event but one that can be put to good use. The company is still expecting to double revenue over the next few years and we expect to see share prices double along with it. 

Lackluster Results Weigh On Salesforce.com 

Salesforce.com had a lackluster quarter but only in terms of the high expectations of the analyst’s community. The company reported $6.86 billion in revenue setting another record and growing 26.6% from last year. The revenue topped the consensus as well but only by a 90 basis point margin which is slim compared to market expectations. 

This is the first full quarter since the addition of Slack as well but the company refrained from breaking out that data. What it did say was that Slack is an important part of its offerings and fast becoming an integral part of its sales. On a subscription basis, subscription revenue grew by 25% over last year to $6.38 billion while the smaller Pro/Other category grew a more robust 45%. 

Moving down the report, the company was able to widen margin and is forecasting wider margins in the coming quarter and next year. The Q3 GAAP operating margin came in at 0.6% versus an expected negative number while at the adjusted level margin hit 19.8%. This delivered GAAP earnings of $0.47 which beat by $0.50 and adjusted earnings of $1.27 which beat by $0.35.  

Looking forward, the company is expecting strength to continue and raised its guidance for the year, the 4th quarter, and next year but there are several things weighing on the market. In short, the guidance is without oomph and suggests YOY growth is decelerating. In our opinion, the guidance is a wee bit cautious and leaves plenty of room for upside surprises. 

C-Suite Changes At Salesforce May Hurt Share Prices 

Salesforce.com announced some c-suite and board changes along with the Q3 earnings report that may also be weighing on share prices. The major news is that long-time employee and recent president Bret Taylor is being elevated to co-CEO and vice-chairman. This move may simply be a means of recognizing Taylor’s value and providing him with additional income but it may also point to possible changes at the company or worse, a top-heavy environment that could impede the company’s success. We’ll see. 

The Technical Outlook: Salesforce.com Pulls Back To Support 

Shares of Salesforce.com are down more than 6.0% in premarket trading and 10% from the recent high putting them in danger of a deeper correction. The good news is that, at least for now, price action is still above key support levels in the region of $265. If support at this level can hold up and/or produce a bounce we see shares of Salesforce.com making a quick recovery. If not then price action may extend the decline down to the $250 level making a full 20% correction. In either case, we view this stock as very buyable.