Salesforce Actions: Prepare Your Capital (NYSE: CRM)
Software stocks were all the rage following the pandemic’s initial panic sale nearly two years ago. Executives saw their stock prices increase in the space of months, and one of those executives was – and still is – Salesforce. (NYSE: CRM).
In July, I wrote a bullish article explaining why I thought Salesforce was going higher. It worked well as stocks almost immediately started to climb, eventually adding around 26% before the recent sell-off began. At the time, I noticed a bullish flag pattern on the weekly chart, which I’ve reproduced below for an updated look.
Source: Stock charts
After the bullish flag, stocks took off higher and finally hit a new all-time high. But the sell-off that slumped growth and tech stocks hit Salesforce, and it canceled the whole rally and more. The stock is testing the 100 week exponential moving average, or EMA, but momentum is picking up quickly on the downside, so I’m not particularly confident it will hold up.
The PPO chart near the bottom shows the short-term line reaching the center line, but with a rapidly declining slope. The histogram shows a value of close to -3, which means there was an episode of a quick sell-off, which is hardly bullish.
Now let’s take a quick look at the daily chart to take a closer look at what has been going on since the start of the sale.
Source: Stock charts
Salesforce has exploded every moving average or price support level over the past two months, and has gone relatively low after relatively low. There is more critical support in the $ 202- $ 209 area, and it looks like we could get a run at that level in the relatively near future, given the performance of growth stocks. This area must hold, or all bets are off for Salesforce in terms of finding a bottom anytime soon.
The only respite from the bulls is that Salesforce is really oversold right now. We have seen this on the weekly chart, and it is certainly true on the daily chart. The PPO has gone from +3 to -4 in the space of two months, and the rate of change is just at levels where the stock has at least started consolidating at times in the past. None of this guarantees that we will see a consolidation or a rebound, but it does suggest that the worst of the sale is over. The low point is still up for debate, but I think if you’re looking to buy Salesforce you should be preparing your capital to do so.
Fundamentals have not deteriorated
Whenever a stock is roughed up like Salesforce has been, the first thing to do is assess the underlying situation to see if there has been some kind of significant deterioration in the outlook for the business. If there was, the sale is probably justified. If there isn’t, the sale is probably an opportunity for Mr. Market to acquire a great business at a lower price. In the case of Salesforce, I think it’s the latter.
Let’s start with the long-term picture, with revenue in millions of dollars and operating margins as a percentage of revenue, both on a rolling twelve month basis.
Revenue has been on a smooth upward trajectory forever, and that’s because Salesforce has experienced reliable organic growth, but it also spends very heavily both on its own R&D and on acquisitions. Salesforce is sort of a conglomerate of software companies aimed at being a one-stop-shop for businesses large and small. She’s building an ecosystem of top apps that all work together for the customer. That’s a big part of why I love it for the long haul.
Source: Company Website
Salesforce says customers who use multiple apps see synergies in doing so, and that’s exactly the point of this type of system. Salesforce has gradually built up what I believe is a world-class suite of software products that compete well today and will continue to compete for a long time to come. None of this is new, but it bears repeating given that it is so critical for the bull’s case.
The problem with this type of strategy is that it requires huge constant investments, whether through selling and administration costs, R&D, or the cost of acquisitions.
This is the same revenue chart as above, but I added the general and administrative expenses and R&D to show how fast Salesforce is spending. Of course, if the income is spent, it does not benefit the bottom line, so profits suffer. Salesforce has adopted a strategy of spending the same proportion of its revenue on general and administrative expenses and R&D (give or take) year after year. In other words, sales and administration costs typically represent around 55% of revenue and R&D around 15% of revenue. The business is comfortable spending that and that’s what has helped it grow over the years. You have to be okay with little to no profit as a Salesforce shareholder in the hope that it will pay off in the years to come.
Keep in mind that Salesforce could be hugely profitable if it cut R&D expenses and some of its SG&A expenses. But it’s a growing business and it’s something you have to be okay with. If you want a technology company that pays dividends, look elsewhere.
Now a big part of the fundamental picture is a company’s estimates, so let’s start with revenue.
Source: In Search of the Alpha
We can see a nice upward slope towards all of these lines, and one that accelerated upward when the pandemic began. Absolutely critically, these estimates continued to rise after the initial pandemic peak, indicating long-term sustainable demand. This is not a business that capitalizes on temporary terms; Salesforce has seen its long-term demand curve shift up and to the right. This chart is very bullish, especially in light of the rapidly declining stock price.
Source: In Search of the Alpha
We see a similar story with EPS, although subsequent years see larger spikes, indicating that analysts believe Salesforce will begin to make more profit from every dollar in revenue. This is certainly not a far-fetched idea given what we have just looked at with the costs of sales and administration and R&D; Salesforce has a lot of expense hindrance it could do to maximize profits.
Another thing I like to watch when it comes to the estimates is the direction of the most recent revisions, which we can see below.
Source: In Search of the Alpha
In the past three months, a lone analyst has lowered their EPS estimates, while four out of 42 analysts have lowered their earnings estimates. In other words, the community is always extremely optimistic, and this is something that I think shareholders ignore at their peril.
Last week, Salesforce’s rating was downgraded by UBS, which cited growth concerns specifically related to MuleSoft. The stocks were punished accordingly, but even this analyst who released a less than optimistic note sees a rise to $ 265; this is the value proposition of Salesforce today.
Speaking of valuation …
Now let’s take a look at the Salesforce assessment to see what kind of value shareholders are getting for their money today. I picked the P / E forward and plotted it for the past five years to give us some historical context.
Stocks are targeting 55 times expected earnings today, which is a lot for most companies. However, in the software space, and especially for perpetual producers like Salesforce, this is pretty reasonable. We can see that the valuation very recently was around 80 times the forward profit, and Salesforce is actually well below the average valuation of the last five years, which is 63 times the forward profit. This includes the pandemic liquidation which saw Salesforce hit a low of 39X very briefly, which I don’t think we’ll see again.
The point is, the valuation of Salesforce today is pretty appealing on its own, but against the backdrop of constantly rising estimates and a fundamental situation that I think is as good as it has ever been. , I see Salesforce as a stock that you can definitely start to rack up.
As I have openly said, given the way growth stocks perform in this market, I certainly wouldn’t rule out a trip to the support levels I identified earlier at just over $ 200. . It’s still a decent descent from current levels so I wouldn’t rush and commit to a 100% position just yet. But the stock is very oversold and in my eyes has an attractive valuation and a very long track for future growth, so I think it’s a buy. It may take a little patience for the recovery to form.