Despite raised expectations, the guidance from Salesforce.com (NYSE:CRM) disappointed, pushing CRM stock a bit lower on Tuesday and keeping it suppressed on Wednesday. The post-earnings-announcement rhetoric, however, was anything but bearish.
The numbers — and negative response to them — are a microcosm of a long-standing debate that’s surrounded the company since its earliest days as a publicly traded entity.
Salesforce stock has been habitually overvalued by every conventional interpretation of the word and, often, seen as a ticking time bomb for the day it fails to grow at a brisk, double-digit clip.
The company has yet to see such a slowdown take shape, though.
And, if CEO Marc Benioff’s feel for what the next five years will look like, that slowdown has yet to even appear on the horizon.
Salesforce Earnings Recap
It’s a textbook picture of superior execution.
The cloud-based customer relationship software platform has no real defensible moat, to be fair. Additionally, a myriad of outfits ranging from Microsoft (NASDAQ:MSFT) to Oracle (NYSE:ORCL) and others are all willing to give customers more for less money.
And, yet, Salesforce.com continues to roll over them, driving results like last quarter’s resounding beat.
For the three-month stretch ending in January, the company beefed up the top line to $3.6 billion, up 26% year over year. Moreover, they turned an operating profit of 70 cents per share of CRM stock versus the year-ago bottom line of 28 cents per share. Analysts expected earnings of 46 cents per share on sales of $3.56 billion.
The backlog, even excluding the benefit of the MuleSoft acquisition, was up 23% YOY to $25.7 billion.
However, the narrative slipped for nearer-term guidance. For the fiscal year now underway, Salesforce anticipates a top line between $15.95 billion and $16.05 billion. Of that figure, between $3.67 billion and $3.68 billion will materialize in the first quarter alone.
Both are below analyst estimates. For fiscal 2020 (essentially calendar 2019), the pros have collectively called for revenue of $16.04 billion. Further, they anticipate $3.7 billion in sales for the current quarter. Also in this present three-month track, profits should roll in between 60 and 61 cents per share. Again, this downgraded forecast falls short of the analyst consensus of 63 cents per share of CRM stock.
At 20 years of age with technology that can be (and is) easily replicated by other competitors, CRM remains relevant. After all, the continued double-digit growth pace impresses, even if it’s slowing down. Thus, the headwind is more about the challenge of competing with the company’s own historical growth.
Still, the expected red flags of size and age have started to wave.
One of them is rapidly escalating spending. While revenue grew 26% last quarter, operating expenditures — including sales and marketing costs — were up 32% YOY. It may be a sign of increased commoditization of customer relationship management platforms.
Still, analysts have largely maintained enthusiasm for growth prospects in CRM stock. Essentially, they regard Tuesday’s dip as a buying opportunity into an organization that’s proven all it needs to prove.
Deutsche Bank analyst Karl Keirstead is one of those optimists, noting:
“Given the solid results and outlook, we’re raising our PT from $165 to $185, based on an assumed FY21E FCF multiple of 34x, up from our prior estimate of 33x and fair given the 20%-25% growth outlook, rising margins and what appears to be conservative FY20 guidance … impressive for a company about to hit its 20th birthday. We reaffirm our BUY rating.”
Morgan Stanley’s analysts also responded positively to the company, stating:
“Three key factors bolster our confidence in the durability of Salesforce.com’s growth longer-term: 1) Targeting a $200 Billion total Available Market … 2) Best in Class Positioning for digitalization initiatives … and 3) the big get bigger in SaaS (software as a service).”
Salesforce suggested it continued to win market share last quarter. If so, the company is holding the position as the favorite within the fastest-growing component of the enterprise software market.
Looking Ahead for CRM Stock
Most analysts may have been looking past the next twelve months, and keying in on Benioff’s longer-term outlook. The CEO believes the company will produce between $26 billion and $28 billion worth of revenue for fiscal 2023 (calendar 2022) and alluded to an annualized run rate of $30 billion following that growth.
That would more than double the company’s current top line, implying a CAGR of roughly 20%.
With little reason to fear, Benioff is merely massaging a stock that’s already up nearly 25% in the trailing year. Shares have almost gained nearly 90% for the past two years, confirming that investors are largely taking analysts’ advice.
CRM stock may be off a bit since immediately before its earnings results were posted, but would-be buyers are already testing the waters. If nearer-term movements are any gauge, the stock was up slightly on Tuesday, while the broad market fell flat.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.