Should You Buy the Dip in Salesforce.com? The shares of cloud-based enterprise software provider Salesforce (CRM) experienced their steepest price decline since the onset of the pandemic after the company posted disappointing earnings guidance for its fiscal...
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The shares of cloud-based enterprise software provider Salesforce (CRM) experienced their steepest price decline since the onset of the pandemic after the company posted disappointing earnings guidance for its fiscal fourth quarter, which overshadowed its better-than-expected third-quarter results. The stock now looks overvalued at its current price level. Furthermore, because the COVID-19 omicron variant is roiling the stock market, is it be wise to buy the dip in CRM? Read on. Let's discuss.
A significant player in the software-as-a-service market Salesforce.com, Inc. (CRM) develops enterprise cloud computing solutions with a focus on customer relationship management worldwide. The company closed its acquisition of Slack Technologies, Inc. ("Slack") in July 2021 for more than $27 billion, and its most recent quarter marked the first-time inclusion of a full quarter of financials from Slack. "Slack saw another strong quarter, and we are pleased with Slack's representation in our largest deals. In this new world, Slack and our Customer 360 have never been more relevant," boasted Amy Weaver, CRM's President, and CFO.
However, CRM shares have tumbled in price despite the company's solid third-quarter earnings release on November 30 because investors focused on CRM's fourth-quarter guidance, which fell short of Street's expectations. For the fourth quarter, the company expects its non-GAAP earnings per share to be $0.72 - $0.73, which is below the analysts' call for earnings of $0.81. The stock plunged 12% in price on December 1, marking its steepest decline since March 2020 at the onset of the pandemic. Mizuho analyst Gregg Moskowitz lowered his price target on CRM, citing the more than expected decline in fourth-quarter guidance, which disappointed investors. He added that the shares "will likely be sluggish near-term."
CRM shares have slumped 9.1% in price over the past five days to close its last trading session at $258.32. The stock is currently trading above its 200-day moving average but below its 50-day moving average.
Click here to check out our Cloud Computing Industry Report for 2021
Here is what could shape CRM's performance in the near term:
Better-Than-Expected Earnings Report
CRM's total revenues increased 26.6% year-over-year to $6.86 billion in its fiscal third quarter, ended October 31. The company's revenues topped the consensus estimate by $59.66 million or 0.9%. Its gross profit stood at $5.02 billion, up 24.7% from the same period last year. However, its income from operations declined 83% year-over-year to $38 million, while its non-GAAP net income decreased 22.2% from its year-ago value to $1.27 billion. CRM's non-GAAP EPS came in at $1.27, versus a $0.92 consensus estimate.
Stretched Valuation
In terms of forward P/E, CRM is currently trading at 210.13x, which is 626.1% higher than the 28.94x industry average. Also, its 9.82 forward EV/Sales ratio is 143.3% higher than the 4.04 industry average. Also, CRM's forward EV/EBITDA is 105.2% higher than the 15.76x industry average, and its forward EV/EBIT is 167.2% higher than the 19.71x industry average.
Mixed Profitability
CRM's 74.02% gross profit margin is 49.8% higher than the 49.42% industry average. Also, its 34.43% levered FCF margin is 188.4% higher than the 11.94% industry average.
However, CRM's ROE, ROA, and ROTC of 3.57%, 1.99%, and 1.03%, respectively, are 57.3%, 45%, and 79.1% lower than the industry averages.
POWR Ratings Reflect Uncertain Prospects
CRM has an overall C rating, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a C grade for Quality, which is consistent with its mixed profitability.
CRM also has a C grade for Growth. Its mixed financials in its last reported quarter justify this grade.
Of the 169 stocks in the Software – Application industry, CRM is ranked #34.
Beyond what I have stated above, one can also view CRM's grades for Value, Sentiment, Momentum, and Stability here.
View the top-rated stocks in the Software – Application industry here.
Bottom Line
Cloud-based solutions have gained significant importance over the past year due to remote working and increased demand for digitization, boosting CRM's top line. The business-software provider benefited from the pandemic-fueled demand for cloud services. However, its bottom line has declined from its year-ago value. And analysts expect its EPS to decline 28.8% in the current quarter and 17.4% in the next quarter. Also, the stock looks overvalued at its current price level. So, we think it could be wise to wait for a better entry point in the stock.
How Does Salesforce.com, Inc. (CRM) Stack Up Against its Peers?
While CRM has an overall POWR Rating of C, one might want to consider looking at its industry peers, Open Text Corporation (OTEX), Commvault Systems, Inc. (CVLT), and Oracle Corporation (ORCL), which have an A (Strong Buy) rating.
Click here to check out our Cloud Computing Industry Report for 2021
CRM shares were trading at $254.95 per share on Monday morning, down $3.37 (-1.30%). Year-to-date, CRM has gained 14.57%, versus a 23.66% rise in the benchmark S&P 500 index during the same period.
Salesforce.com, Inc. (CRM) is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
About the Author: Subhasree Kar
Subhasree's keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master's degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.
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