Back in October of last year, I wrote about worrying signs regarding certain growth stocks. And I had put cloud services company Salesforce (NYSE:CRM) on that list. At the time, I wrote that in the longer-term picture, CRM stock benefited from multiple tailwinds. These included increasing trends toward the cloud and digitalization overall.
However, I was calling things as I saw them, not how I wanted them to be. Therefore, I noted that Salesforce stock produced an incredibly ugly chart. Essentially, the price action was sandwiched between the 50-day moving average at the top, and the 200-day moving average below. Under normal circumstances, this is a strong technical signal to get out.
Adding to that point, this was when the U.S.-China trade war started to gain traction. So with geopolitical uncertainty and an ugly price chart for CRM stock, the choice was obvious. And while the resultant moves were incredibly choppy due to the “will they, won’t they” trade war drama, Salesforce stock dipped in both November and December.
Sure enough, we’re back at it again.
I supposed you would call the current juncture “trade war 2.0.” Whatever it is, it’s nasty. With neither side wanting to give an inch, we’ve only seen an escalation in rhetoric and actions. Of course, the Dow Jones Industrial Average incurred a significant drop, while CRM stock took a scary spill weeks earlier.
Over the past few sessions, Salesforce stock has crept upward. But like late last year, CRM is in an ugly position, this time below both the 50- and 200-day moving averages. How then should investors respond?
Fundamental Risks Cloud CRM Stock
Naturally, a contrarian viewpoint exists here. When I wrote about my concerns for Salesforce stock last year, I suggested that investors shouldn’t stay negative for too long due to the positive fundamentals. As you know from hindsight, CRM did indeed come back strong.
Therefore, some might assume that CRM stock will pull off a repeat performance. Even though we see some trading activity that suggests shares will decisively fly higher, I have my reservations.
At this stage, I’m now concerned about the fundamentals. First, Salesforce has been making aggressive moves lately in terms of acquisitions and partnerships. One of those is a joining of forces with Chinese internet and e-commerce giant Alibaba (NYSE:BABA).
I’m going to set aside the fact that this relationship is occurring at a politically awkward time. Instead, let me focus on why they secured a partnership: Alibaba lacks small- and medium-sized business coverage, while Salesforce wants to expand into China and the broader Asian market.
On paper, this partnership should boost CRM stock. Instead, the announcement was made right before shares tumbled badly. And I’m not sure if we’ll see a recovery like we did earlier this year.
This brings me to my second point. The trade war has terrible implications for Salesforce stock. Obviously, management’s ambitions for China must now be kept in check. Admittedly, though, the Asian market only represents 10% of Salesforce’s total revenue.
But the trade war isn’t just about China. If you look at what’s going on in Germany, they’re about to fall into a recession. As the European Union’s powerhouse member, that will have a negative ripple effect on CRM stock. The company gets 20% of its top-line sales from Europe.
Risks Also Abound at Home
Taking a sizable hit to 30% of your total revenue stream doesn’t do you any favors. However, CRM stock is very much an American investment in that it generates the most revenue on this hemisphere. Thus, the remaining 70% should help buffer the storm, right?
I’ll concede that this is a valid counterargument. However, the worry is that Salesforce is stretching itself too thin with its acquisitiveness. But the biggest concern is how small- and medium-sized businesses here at home can ride a possible recession.
To no one’s surprise, small businesses suffer bankruptcies at a higher rate than larger firms during economic downturns. I’m not tying to belabor you with the obvious. Instead, I want to emphasize that Salesforce has a significant revenue channel with the small business community.
If that goes, then we’re talking about three revenue channel disruptions: China, Europe and American small businesses. I don’t think anyone doubts that Salesforce stock can overcome modest challenges. But the current environment suggests something much bigger, which means you should probably head for the sidelines.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.