CRM: Ignore the Buyout Rumors, Pay Attention to Salesforce Earnings

Cloud-computing giant, Inc. (NYSE:CRM) will report first-quarter earnings results Wednesday after the closing bell. Like most momentum stocks, CRM will set the tone for other cloud software companies like Workday Inc (NYSE:WDAY) that has yet to report. (CRM) LogoHowever, seeing as the rumor mill is filled with potential buyout candidates for CRM, Salesforce earnings results appear to have taken a backseat in the story line. And that’s a mistake.

With a market cap of almost $50 billion, it’s not hard put together a short list of candidates that can afford CRM. Beyond Microsoft Corporation (NASDAQ:MSFT), International Business Machines Corp. (NYSE:IBM) and SAP SE (ADR) (NYSE:SAP), few software companies had enough cash to make a deal work.

In my opinion, Oracle Corporation (NYSE:ORCL) made the most sense, but that no longer seems likely, given Oracle’s response to a recent merger and acquisition inquiry about a deal. It was shot down. But that means nothing for CRM and the earnings it will deliver Wednesday, which is where investors’ focus should be.

The Big Picture in Salesforce Earnings

For the quarter that ended April, analysts will be looking for 14 cents per share on revenue of $1.50 billion, marking year-over-year increases of 27% and 22%, respectively. For the full year, ending in January, CRM is expected to deliver a 32% year-over-year earnings jump, reaching 69 cents per share, while full-year revenue of $6.51 billion calls for a 21% jump.

The market is missing the big picture here, preferring all the M&A chatter. In both the quarterly and full-year estimates, CRM is projected to grow earnings at faster rates than revenue. When’s that ever happened? CRM has long-been criticized for favoring growth over profits. These arguments can now be put to rest, and it certainly explains why any company would be interested in CRM, if you believe the rumors.

CRM stock closed Friday at $72.40, down 0.66%. While CRM stock is up 22% so far in 2015, the shares are down almost 8% in the past two weeks. The decline in CRM stock followed a 17% surge on April 29, climbing from $66.89 to $78.46, on rumors that CRM was an acquisition target by an “unnamed software company.”  Wednesday’s Salesforce earnings should reverse this trend, however.

Why? CRM stock easily an $80 position that is trading at a discount to fiscal 2017 earnings, which are projected to grow 33% year over year to 92 cents per share. Sure, that puts the price-to-earning ratio of 78, but it’s still much lower than CRM’s historical average P/E. Just as we discussed with, Inc. (NASDAQ:AMZN), it’s a fools game trying to make sense of CRM’s P/E. When has that ever mattered?

Care to guess CRM’s average P/E over the past five years? Salesforce’s P/E range has been between the high double digits and low triple digits for the past five years. During that span, CRM stock has surged 242%, delivering 50% annual gains to CRM shareholders, against just 14% average five-year gains for the Dow Jones Industrial Average.

Bottom Line for CRM Stock

So, all of this M&A chatter is owed to a report that CRM had hired investment bankers to evaluate “takeover offers” is all noise, masking what’s really important about Salesforce earnings and CRM stock. The cloud market has been robust and will continue to drive profits for Salesforce next year and beyond, making CRM stock a solid cloud play. And should a deal occur, that’s just icing on the cake.

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

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