Salesforce (NYSE:CRM) will be releasing its fiscal fourth-quarter earnings on March 1 after the market closes. Investors should expect CRM stock to start recovering from its recent dramatic downturn in the last three months.
For example, Salesforce stock peaked around Nov. 9, 2021 at $309.71 per share. This was right before it released its fiscal Q3 earnings report for the quarter ending Oct. 31 on Nov. 30, 2021.
But ever since then, the stock has cratered. It reached a low on Feb. 23 of $190.54. That represents a drop of 38.5% in the last three months.
In other words, investors are dumping CRM stock. Apparently, it was overvalued. But if the company produces decent earnings, it could be looking more like a bargain.
Where Things Stand With CRM Stock
Last quarter, Salesforce produced $6.86 billion in revenue, up 27% year-over-year (YOY). But it also guided for revenue of $7.224 billion to $7.234 billion, implying a quarterly rise of 5.3% to 5.45%.
However, analysts surveyed by Refinitiv and tracked by Yahoo! Finance expect to see sales hit $7.24 billion, a quarter-over-quarter (QOQ) rise of 5.54%. This is slightly higher than even the company’s own forecasts. Given that Safesforce guided for its $7.23 billion revenue forecast, there is a good chance it will occur.
Moreover, it’s not like the company is losing money. Salesforce is actually still profitable despite the downturn it took in Q3. That dip was mainly due to a fall in the value of its strategic investments.
In fact, for the December quarter, Salesforce guided that non-GAAP earnings per share (EPS) will range between 72 cents and 73 cents.
Where This Leaves Salesforce
The average EPS estimate of 45 analysts for the year ending Jan. 2022 is $4.69, according to Seeking Alpha’s survey. That puts CRM stock on a forward price-to-earnings (P/E) multiple of about 40.6 times.
Moreover, the Jan. 2023 estimate for $4.75 EPS puts it on a forward P/E of just over 40 times. This is not cheap, but it’s a lot better than its own historical average.
For example, Morningstar reports CRM stock has had an average P/E of more than 62.4 times in the past five years. That seems to imply the stock has fallen to the point where it might be a good investment.
Additionally, if earnings come through better-than-expected, the forward P/E multiple will be lower than 40 times.
What Analysts Say About CRM Stock
As it stands, analysts think Salesforce stock is undervalued. Seeking Alpha reports that in the last 90 days, 49 analysts have an average price target of $321.18. Moreover, the average of 46 analysts is $319.80 according to Yahoo! Finance.
These are substantially higher than the present price of $190.54. In fact, two analysts recently maintained their “buy” recommendations on CRM stock, according to Yahoo! Finance.
The problem analysts have is that the company is now projecting slower growth. As Barron’s reported, Salesforce expects slower growth in current remaining performance obligations (RPO).
This is seen as an indicator of future growth, since it includes contract obligations that eventually turn into revenue. The RPO projection of 19% for the January quarter was below the 23% growth in the October quarter.
What to Do With CRM Stock
The issue that arises with this stock is what to do with a slowing growth stock. What is the appropriate P/E multiple?
As it stands, CRM stock has settled now at a 40 times future P/E. Assuming analysts raise their earnings estimates if the company produces better-than-forecast earnings, then they are likely to raise their price targets for CRM stock.
As a result, it’s possible the stock could rise after the upcoming earnings release on March 1.
On the date of publication, Mark Hake directly held a long position in VeChain crypto but not in any other of the securities mentioned in this article, either directly or indirectly. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.