The shares of the cloud-based customer relationship management (CRM) software company Salesforce.com (NYSE:CRM) is up more than 35% over the past year. The overall fundamental strength of the company has been the catalyst behind the Salesforce stock returns.
Between now and when Salesforce reports earnings on June 4, there is likely to be volatility and even some profit-taking in the stock price, especially as many other technology firms also report in the coming weeks.
However, I’d encourage long-term investors who would like exposure to a growth company in the sector to regard any dip in the share price as an opportunity to add CRM stock to their portfolio.
Salesforce Is an Industry Leader
Not many investors are fully versed in the fundamental strengths of the Salesforce stock. In a nutshell, customer relationship management software systems connect businesses with customers. For example, the software enables a company’s support and sales teams to have all possible information about any given customer so that they can offer the right mix of customer service at the right time. It is the biggest software market globally.
Wall Street credits Marc Benioff, Chairman and co-CEO with popularizing the software for managing customers, sales, and service. Revenues in the CRM market are expected to reach $80 million by 2025. And Salesfoce.com is regarded as the clear industry leader.
Salesforce’s market share is about 20% and over 80% of all Fortune 500 companies use its CRM software. On the other hand, the respective market share of each of its competitors such as Oracle (NASDAQ:ORCL), SAP SE (NYSE:SAP), Microsoft (NASDAQ:MSFT), and Adobe (NASDAQ:ADBE) is in single digits.
CRM Stock Has Robust Fundamental Numbers
On March 4, Salesforce announced results for its fiscal Q4 as well as the full fiscal year that ended on Jan. 31, 2019. “We had another year of outstanding revenue growth, surpassing $13 billion in revenue faster than any other enterprise software company in history,” said Mr. Benioff.
Growth was strong across geographic markets, products, and sales segments. CRM stock increased its fourth-quarter revenue to $3.6 billion, a jump of 26% year-over-year (YOY). It also reported a total of $5.38 billion in unearned revenue, an increase of 25% YOY. This metric accounts for sales that Salesforce has already made but, due to accounting rules, will only recognize later within the next 12 months.
The jump in revenue also drove a 29% increase in CRM’s quarterly operating cash flow, to $1.33 billion. Finally, the company announced an annual revenue goal of $26 billion to $28 billion
by fiscal year 2023, an impressive feat for a company with a market cap of over $126 billion.
Salesforce Stock and Strategic Investments
Salesforce has been branching out into other business ventures, too. This expansion is made possibly partly due to its steady free cash flow (FCF), which measures a company’s ability to produce cash. The juggernaut’s total free cash flow for the trailing twelve months (TTM) ended in January was $2.8 billion.
Investors care a lot about FCF as it can be used in a discretionary manner, for example, to invest in growth opportunities and to strengthen CRM’s balance sheet further.
The cash-rich company is also not shy to acquire smaller businesses that management deems a good fit with its existing product lines and growth ambitions. The $6.5 billion takeover of the business software company MuleSoft in 2018 was Salesforce’s largest acquisition to date. Analysts believe that MuleSoft will increase Salesforce’s ability to help customers integrate other systems into Salesforce.
Several of CRM stock’s past investments include Docusign (NASDAQ:DOCU), Domo (NASDAQ:DOMO), Dropbox (NASDAQ:DBX), SurveyMonkey parent SVMK (NASDAQ:SVMK), and Twilio (NYSE:TWLO). Its most recent investment has been in Zoom Video Communications (NASDAQ:ZM) which went public on Apr. 18. In other words, these investments help Salesforce position itself for future success.
What Could Derail CRM Stock Short-Term?
Year-to-date, CRM stock is up 17%. As a result of the recent impressive run-up in the stock price, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that Salesforce’s technical message has also become “overbought.”
Furthermore, over the past few weeks, CRM stock has been trading between $150 and $160, a range that is likely to be broken soon either to the upside or to the downside.
Should bulls reignite, they could easily push Salesforce stock over $165. On the other hand, if there is a pullback, the $145 level looks like a spot to me to consider buying into CRM stock.
Although I’m expecting some short-term profit-taking in CRM stock, I’d not fight the tape and would be willing to re-evaluate the technical charts in the coming days.
Salesforce stock’s beta is 1.37, which means its volatility on average is 37% higher than that of the broader market. Therefore, if the industry or the overall market declines as other companies release earnings, Salesforce stock price may also be adversely affected.
If you are worried about the overall earnings season in May and would like to protect some of your profits in the CRM stock, you may consider a covered call strategy with approximately a five-week time horizon.
In that case, you may, for example, buy 100 shares of CRM at a limit price of $163.09 (the closing price on Apr. 25) and, at the same time, sell a CRM May 31 $160 call option, which currently trades at $6.65.The $160 option is slightly out-of-the-money, offering downside protection in case of volatility and a decline in Salesforce stock.
This call option would stop trading on May 31 and expire on June 1.
I would not advocate bottom-picking in case of near-term price weakness. Yet, I find CRM stock to be a compelling buy candidate and by the end of 2020, I’d expect the shares to reach $175. In other words, it’s still a good time to be bullish on Salesforce.
Bottom Line on CRM Stock
Salesforce stock is a fundamentally sound stalwart investment with further broad-based growth prospects, leadership in the respective market, and proactive management — factors that are likely to translate into a strong balance sheet and robust bottom line in the rest of the decade.
Investors who are interested in software stocks or cloud-based services, but do not want to commit all their capital to a single stock such as Salesforce may also consider investing in various exchange-traded Funds (ETFs) that have CRM stock as a holding, including iShares Expanded Tech-Software Sector ETF (NYSE:IGV), First Trust Cloud Computing ETF(NASDAQ:SKYY), or PowerShares Russell Top 200 Pure Growth Portfolio (NYSEARCA:PXLG).
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.