There are two ways to look at the recent run in Salesforce.com, Inc. (NYSE:CRM) stock. There’s the “don’t fight the tape” argument. CRM stock has risen 30% year-to-date, and 6% over the past month. Heading into the Salesforce earnings report on Thursday, there is clear momentum.
On the other hand, there’s a sense that Salesforce earnings could be a bit of a trap. A higher share price — and CRM is near an all-time high — means higher expectations. And higher expectations, in the market and in life, mean a higher chance of being disappointed.
For now, I’m firmly in the former camp. There are some concerns around CRM stock — but they seem unlikely to arise in Salesforce earnings for Q1. Wall Street analysts are firmly behind the stock, which helps. And the company’s original Q1 guidance was seen as light, which may help the chances of a top- and/or bottom-line beat.
Large-cap tech has been a graveyard for shorts this year, with Facebook Inc (NASDAQ:FB) up 29%, Amazon.com, Inc. (NASDAQ:AMZN) up 28%, and Netflix, Inc. (NASDAQ:NFLX) rising 29%. CRM’s 30% gains fit in line with that trend. (Perhaps the FANG stocks need to be renamed ‘FANGS’.) And there’s little to reason to see that trend changing into, or out of, Salesforce earnings.
Q1 Earnings Set Up Well for CRM Stock
Again, don’t fight the tape. Last week, Piper Jaffray called CRM stock “the most attractive stock” in its coverage universe. Morningstar called CRM stock a ‘top pick’ heading into the year; UBS, Cowen, Morgan Stanley and Goldman Sachs Group Inc all are bullish on CRM to varying degrees.
It’s true that Wall Street analysts get it wrong sometimes. (Maybe half the time, or more, depending on your perspective.) But in terms of post-earnings trading for a growth stock like Salesforce.com, that support is helpful. It creates a base of analysts willing to pound the table for the long-term case even if Salesforce earnings miss by a penny or two.
And it’s important to consider the context of the market. Investors right now are very forgiving in terms of growth stock valuations. (Exhibit A on that front is Tesla Inc (NASDAQ:TSLA) stock.) They’re patient in keeping a long-term outlook. It’s going to take a major miss to change the narrative toward CRM stock — and there’s little evidence to suggest a stumble of that level is on the way.
Longer-Term Questions Remain for Salesforce
That doesn’t necessarily mean that CRM stock is a screaming buy. Growth stock investors tend to be forgiving — until they’re not. And with Salesforce trading at 53x 2017 consensus earnings per share estimates, its valuation is sky-high.
Competition is on the way as well. Oracle Corporation (NYSE:ORCL) is trying to reclaim its past glory. Adobe Systems Incorporated (NASDAQ:ADBE) and Microsoft Corporation (NASDAQ:MSFT) are teaming up to target both providers. Salesforce earnings are going to grow — but if competition leads to pricing pressure and/or increased sales and marketing spend, they may not grow enough to support the current roughly $90 share price.
Stick With CRM
But, for now, the story at Salesforce.com still seems intact. And in this market, a good story solves a lot of problems.
That may change — the market may weaken, or Salesforce.com may see its story get a bit more complicated. But that change is highly unlikely to come in the earnings report for this quarter, and that means CRM stock likely has more room to run.
As of this writing, Vince Martin has no positions in any securities mentioned.
