Salesforce.com, inc. (NYSE:CRM) is getting pounded in Wednesday’s after-hours trading, with CRM stock off about 9% in quick order. In short, Salesforce’s second quarter was fine, but its look ahead was miserable.
Salesforce, the leader in the cloud computing space, beat Q2 expectations. Earnings of 24 cents per share were 2 cents better than expected, and revenues of $2.04 billion — up 25% year-over-year — were just enough to get over estimates for $2.04 billion.
What really was weighing on CRM stock was the muted outlook. Salesforce.com expects revenues of $2.11 billion to $2.212 billion for the current quarter, and earnings in a range of 21 to 22 cents. Wall Street was looking for revenues of $2.13 billion, which was under the midpoint. But CRM couldn’t meet analysts’ target of 24 cents.
Even though CRM increased its full-year guidance to a range of $8.275 billion to $8.325 billion, this also did not impress. Analysts had forecast about $8.3 billion.
A few other highlights:
- Deferred revenues climbed 26% YoY to $3.82 billion
- Unbilled deferred revenue improved by 29% YoY to $8 billion
- Cash from operations dropped 18% YoY to $251 million
- Salesforce now has $1.72 billion in cash and equivalents
Salesforce (CRM) Is Buying and Bloated
Salesforce has done a great deal of moving and shaking to get CRM shares moving and shaking, but to little effect.
The Wall Street Journal, in a recent report, noted that Salesforce already has announced seven M&A deals this year, three within the past three months. The total price tag comes to about $4 billion, including the biggest-ticket purchase — a $2.8 billion buyout for Demandware. And that was hardly a steal, the Journal points out, as CRM paid an enterprise value of 8.3 times sales.
It also looks like the company is not afraid of attempting a transformative deal either. After all, CRM was willing to lob a bid surpassing $26 billion for LinkedIn Corporation (NYSE:LNKD).
The company’s M&A targets are sensible, but whenever a company starts getting too aggressive on this front, it could be a sign of trouble. That is, growth might be getting more elusive. This is a problem we’ve seen with other tech operators such as Cisco Systems, Inc. (NASDAQ:CSCO) and HP Inc (NYSE:HPQ), which were not able to deal with the extreme complexities of integrating disparate companies via dealmaking.
Despite all of the fresh blood, CRM stock was staring at a 1% gain heading into Tuesday’s earnings. That compares poorly to 4% gains for the Nasdaq and 6% gains for the S&P 500.
Part of the brick wall has been Salesforce’s own valuation. Analysts project 26% earnings growth this year and nearly 40% profit growth the year after that. Revenues are expected to expand 25% this year before slowing to 22%. Still, that doesn’t seem enough to make CRM’s price-to-earnings ratio of 60 seem palatable.
Bottom Line
Salesforce could pick up a tailwind from its tech mega-conference, Dreamforce, in early October. CRM plans to launch its ambitious Einstein, which the company boasts will be “the world’s first comprehensive artificial intelligence platform for CRM.”
It had better be. Because if not, CRM stock could have some more difficult days.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
