Is Salesforce's share price undervalued ahead of Q2 earnings?

Expectations are that Salesforce [CRM] will see a decline in quarterly earnings when it updates the market on Thursday. Yet with Salesforce’s share price down since the start of August, traders could be eyeing up a bargain if the CRM giant beats expectations.


What happened in Q1?

Salesforce beat analyst expectations for top and bottom line growth in Q1. Earnings per share came in at $0.93, beating the forecasted $0.61. Revenue was $3.74 billion, up 24% from the previous quarter and crushing the $3.68 billion Wall Street was expecting. 

Salesforce’s Service Cloud delivered $1.02 billion in business, breaking the $1 billion mark for the first time. The success of Service Cloud is testament to the company’s ability to upsell products to existing clients. Something that will be closely watched in Q2.


What's happening with Salesforce's share price?

Salesforce’s share price has been volatile throughout August, at one point down 10% since the start of the month.  This is for two reasons. One is that investors are worried that the company is running out of growth opportunities in its main cloud business.

The second is the dilutive effect the $15.7 billion acquisition of Tableau has had on the stock. Salesforce issued more shares to fund the heavyweight deal, resulting in a warning that earnings per share would decline $0.20, to $0.22 cents.


What to look out for in Q2?


Revenue growth

Salesforce has delivered consistent revenue growth over the past few quarters. For Q2, management has issued guidance for between $3.94 billion and $3.95 billion in revenue. Yet analysts are expecting the metric to come in at the top of this range, at $3.95 billion.

Driving revenue is the continued appetite for digital transformation programs domestically and internationally. Despite optimism, the company's spree of acquisitions like Tableau looks set to weigh on earnings.


Service cloud continues to deliver

In Q1 Salesforce's Service Cloud revenue increased 20% year-on-year to come in above $1 billion. According to Salesforce executives the acquisition of ClickSoftware for a cool $1.35 billion will see further growth for Service Cloud.

Bill Patterson, EVP and GM of Salesforce Service Cloud said following the deal:

“Our acquisition of ClickSoftware will not only accelerate the growth of Service Cloud, but drive further innovation with Field Service Lightning to better meet the needs of our customers.” 

While the acquisition won't be finalised until the Autumn, investors will be looking for an update on where ClickSoftware fits in during the earnings call.

“Our acquisition of ClickSoftware will not only accelerate the growth of Service Cloud, but drive further innovation with Field Service Lightning to better meet the needs of our customers.” - Bill Patterson, EVP and GM of Salesforce Service Cloud


Is an earnings beat in store?

Zacks Consensus Estimate expects Salesforce to see earnings of $0.74 per share for the quarter. This would be a drop of 33.8% from the same quarter last year. Revenue is forecast at $3.95 billion, a 20.4% jump.

While last quarter saw a beat, investors shouldn’t get their hopes up this time. Zacks earnings ESP (expected surprise prediction) comes in at -2%. Although Zacks cautions against using a negative earnings ESP as being indicative that a miss is on the cards, it could point to analysts becoming overly bearish on the stock's earnings chances.


Time to buy?

Going against the grain is Compass Point who think now could be time to pick up the stock. Last week it upped its rating to ‘Buy’ based on Salesforce’s ability to upsell.

The investment firm also said that the Tableau acquisition won’t slow growth in the stock. If anything, the share price is currently undervalued. As analysts at Compass Point explain:



Market cap £126.10bn
PE ratio (TTM) 98.33
EPS (TTM) 1.47
Quarterly Revenue Growth (YoY) 24.30%

Salesforce share price vitals, Yahoo finance, 19 August 2019



"The stock has recently underperformed the market as investors worry that last month’s Tableau acquisition announcement is a sign that overall growth may be slowing – which is a view that is contrary to our research and the discrepancy in viewpoints drives our Buy rating."

Morgan Stanley's Keith Weiss agrees that the stock could be a bargain at its current price. Weiss reckons it's worth picking up the stock for under $150 as it has the potential to bounce back to $178 a share. If negative expectations are already priced into the stock, then an earnings beat could well see the stock rally. Should Salesforce miss expectations, further lows could be seen in August.

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