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Expect a Huge Move From Salesforce.com, Inc. (CRM) Stock After Earnings

After a strong start to 2017, Salesforce.com, Inc. (NYSE:CRM) stock has stalled out over the past few months. CRM stock has hit heavy resistance around $90, and has been tightly range-bound since early May.

Expect a Huge Move From Salesforce.com, Inc. (CRM) Stock After Earnings
Source: Shutterstock

I’d expect that to change coming out of the Salesforce second-quarter earnings report, to be released Tuesday afternoon. CRM stock typically doesn’t stay that quiet for that long.

While cash flow numbers are substantially better than earnings figures, this remains a stock trading at nearly 70 times the midpoint of its FY18 (ending January) per-share earnings guidance.

That kind of multiple usually leads to volatility. Meanwhile, competition is increasing, Salesforce.com is lapping last year’s acquisition of Demandware and investors have become addicted to “beat and raise” quarters.

Heading into the CRM earnings, the options market is pricing in just a 5% move for CRM stock. From here, that looks a bit too low. There’s reason to think Salesforce’s Q2 earnings will have at least some fireworks.

CRM Stock By the Numbers

For Q2, analysts expect Salesforce.com to generate revenue of just over $2.5 billion, up 23.4% year-over-year. Billings (which excludes quarterly changes in deferred revenue) are pegged to rise 18%. Non-GAAP EPS consensus sits at 32 cents, which would represent a 33% increase against Q2 FY17.

Simply based on the numbers, there’s reason to think CRM stock might be set up well for Q2. As Evercore Partners Inc. (NYSE:EVR) pointed out last week in reiterating a “buy” rating and a $110 price target on CRM stock, year-over-year comparisons are easier in the second quarter than they were in the first. Similarly, third-quarter consensus, which projects a modest deceleration in growth, could lead to quarterly guidance coming in ahead of expectations.

The question is whether a beat can move CRM stock. Salesforce appears to guide conservatively and perform well. Amazingly, it hasn’t missed consensus on either earnings or revenue since at least calendar 2014.

First-quarter earnings were ahead of the Street by 2 cents, and revenue grew 2 points better than expected. But the market basically shrugged. And with CRM stock dearly priced in a market that looks a bit shaky at the moment, anything short of a big beat from Salesforce.com might be punished.

Can CRM Keep Its Growth Intact?

There are some growing, if modest, concerns that could amplify the impact of second-quarter numbers. Competition for Salesforce.com continues to increase. While the attention on Microsoft Corporation (NASDAQ:MSFT) largely has focused on its Azure platform, Microsoft Dynamics also appears to be making some headway in challenging Salesforce’s legacy CRM application.

Salesforce Service Cloud is battling ServiceNow Inc (NYSE:NOW) for supremacy. And ServiceNow is coming off an impressive quarter in which its revenue rose 38% year-over-year.

And in both CRM and the marketing business Salesforce picked up in buying ExactTarget, incumbent rival Oracle Corporation (NYSE:ORCL) is trying to take back share.

It’s not as if Salesforce growth is going to suddenly stall out in Q2, of course. But valuation here is stretched. The recurring revenue generated by Salesforce.com business is attractive — but it also means a modest miss in a single quarter has a noticeable impact on models of future cash flow.

If Salesforce.com can manage that competition and beat estimates regardless, CRM stock could bust through resistance and even challenge $100. But if expectations are missed, the Q2 report could be ugly for CRM.

Big Q2 in the Cards

The options market is forecasting just a 5%-plus move for CRM stock this week, based on at-the-money straddle pricing. From here, that looks a bit low. Technically, CRM stock is right at resistance, which often amplifies post-earnings moves.

Investors are pretty much trained to expect some kind of beat — and Salesforce stock likely would sell off if either Q2 results or Q3 guidance disappoints. And the overall market has been a bit choppy the past few sessions.

With CRM still up nearly 33% year-to-date even after quiet trading the past few months, a “sell first and ask questions later” response to Q2 earnings wouldn’t be a surprise.

All told, Q2 does look like a reasonably important quarter for Salesforce.com. A miss doesn’t break the long-term case, to be sure. But the high expectations, high valuation, and a choppy market generally means a bigger move than the markets are expecting right now.

Traders can consider a long options straddle on CRM stock, which would profit from a move larger than 5% in either direction this week. Right now, I’d expect that kind of move — at least.

As of this writing, Vince Martin has no position in any securities mentioned.

Article printed from InvestorPlace Media, https://investorplace.com/2017/08/expect-a-huge-move-from-salesforce-com-inc-crm-stock-after-earnings/.

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