Shares of Salesforce (CRM) have risen some 9% over the past month, besting the 4% rise of the S&P 500 index. With increased productivity amid the coronavirus-induced shift towards work-from-home, Salesforce is seen as a major beneficiary over the next several quarters. But is there a downside?
The enterprise cloud giant is set to report second quarter fiscal 2021 earnings results after the closing bell Tuesday. Despite emerging threats from competitors like Adobe (ADBE), ServiceNow (NOW), among others, Salesforce is still lauded on Wall Street. The company’s SaaS business model and its customer relationship management services are a must-have for companies looking to add capabilities such as sales, marketing, e-commerce and analytics to grow their businesses.
The company on Friday received a Street-high target of $254 by analysts Patrick Walravens of JPM Securities. Citing “strength in the Service cloud” and what he calls “sales morale,” the analyst boosted the stock price to $254, up from $191, arguing that the sock would trade at $300 if it were priced inline with its peer group. The valuation argument is nothing new for Salesforce. But the company’s stock has had a history of disappointing after earnings results are released. Will this time be different?
Results from recent enterprise giants such as Cisco (CSCO) and Oracle (ORCL) suggests there’s a softer IT spending environment given that corporations have begun to shift (or postponing) IT projects due to the pandemic. At the same time, this shift could accelerate the rate at which companies are growing their digital presence which would bode well for Salesforce. That answer will come in the company’s forward guidance and in Salesforce’s billings metrics which is a closely-watched gauge future revenue.
For the quarter that ended July, Wall Street expects the San Francisco-based company to earn 67 cents per share on revenue of $4.9 billion. This compares to the year-ago quarter when earnings came to 66 cents per share on revenue of $4 billion. For the full year, ending in December, earnings are projected to decline 1% year over year to $2.96 per share, while revenue of $20.07 billion would rise 17.4% year over year.
It’s notable that during the pandemic that Salesforce’s full-year revenue are still projected to rise at almost 20%. But strong revenue and earnings growth projections are commonplace for the company, which has topped or matched the Street’s earnings estimates in twenty straight quarters. Prior to the pandemic, investors had grown concerned about increased competition Salesforce faces from the likes of Microsoft (MSFT) and Oracle and their impact on Salesforce’s growth in the next couple of years. The company seemed to fuel that fear in the first quarter.
Although first quarter revenue (up 30%) and earnings surpassed Street estimates, Salesforce guided for a slowdown in Q2. The company also cut its full-year revenue, EPS and free-cash-flow outlook as well. It’s likely that the management was downplaying expectations to set up for a strong beat. But it nonetheless supports investors’ concerns about valuation and the competition. In other words, while the enterprise shift towards cloud-based data is not slowing down, Salesforce will need to affirm its market dominance to keep the stock from selling off.
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