2 Ways to Trade Salesforce.com Before Earnings (CRM)

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Salesforce.com (CRM) will step into the earnings limelight after the close of trading tomorrow, and expectations are trending bullish for this cloud computing professional services firm.

And the two trades I’m considering right now aren’t exactly going against that grain.

Currently, Wall Street is looking for a second-quarter profit of 18 cents per share on revenue of $1.6 billion. But while earnings and sales are expected to rise 38% and 21%, respectively, Salesforce.com has had a tough time meeting the consensus estimate. Specifically, during the past eight quarters, Salesforce.com has missed Wall Street’s targets six times.

Still, that hasn’t stopped bullish speculation surrounding the company’s coming second-quarter report. In fact, EarningsWhisper.com reports that CRM’s whisper number comes in at 19 cents per share, a penny better than the Street.

CRM 8-19-2015
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What’s more, the company’s struggles with hitting quarterly targets has done little to slow CRM stock’s advance this year. Year-to-date, CRM stock has risen more than 22% — though the stock has entered a trading range between $70 and $75 since hitting an all-time high in late April. Currently, CRM is nearing the upper level of this trading range after bouncing off $70 last week.

On the sentiment front, Wall Street thinks rather highly of CRM’s prospects. In fact, according to data from Thomson/First Call, 41 of the 48 analysts following the stock rate it a “buy” or better, versus four “holds” and three “sell” ratings. Most recently, Vetr upgraded CRM stock to “strong buy” on Tuesday.

That said, if Salesforce.com fails to live up to expectations, the shares may be in for a downgrade or two. Specifically, the 12-month consensus price target rests at $82, leaving CRM only about 12% upside potential. If analysts begin to see the stock as “fully valued,” “hold” ratings may begin to emerge.

Checking in with CRM options, speculative traders are also quite bullish. Currently, the August/September put/call open interest ratio for CRM comes in at 0.50, with calls doubling puts among near-term options. This ratio rises only slightly to 0.53 for the August series, which expires at the end of this week.

Overall, August option implieds are pricing in a potential post-earnings move of about 7.4% for CRM. This places the upper bound at $77.89, while the lower bound lies at $67.11. Either way, it appears that CRM is poised to finally breakout of its weekslong trading range between $70 and $75.

2 Trades for CRM Stock

Call Spread: While Salesforce.com has had a shaky history in terms of beating Wall Street’s targets, I’m not inclined to bet against the bullish collective in the brokerage community on a stock that has performed rather well so far in 2015. As such, traders looking to bet bullish on CRM ahead of earnings may want to consider a Sep $72.50/$77.50 bull call spread.

At last check, this spread was offered at $1.98, or $198 per pair of contracts. Breakeven lies at $74.48, while a maximum profit of $3.02, or $302 per pair of contracts, is possible if CRM closes at or above $77.50 when September options expire.

Puts Sell: With CRM nearing the top end of its trading range, there is a possibility for weak price action and a continuation of CRM’s consolidation. In this case, an Aug $67 put sell may make sense. At last check, the Aug $67 put was bid at 71 cents, or $71 per contract.

On the upside, you keep the premium received as long as CRM stock closes above $67 when August options expire at the end of this week. On the downside, should CRM trade below the sold strike ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $67 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/salesforce-com-earnings-preview-2-trades-crm-stock/.

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