Software stocks had a strong start to the year, but as 2019 continued, many share prices found the wind was being taken out of their sails as the sector experiences a pullback, and a rotation into more defensive stocks ensued.
Howard Lindzon, financial analyst and investor has highlighted this phenomenon, pointing out how software stocks continue to lose momentum. “It might last three months more, or it could go on for 12 months, but right now rotation is into biotech, healthcare, financials and large-cap tech,” he wrote in his daily newsletter.
California-based software giant Salesforce [CRM] appears to be no different. It’s share price, after popping in March, has since fluctuated. In August, it slumped to a low for the year. Since then, however, it appears to be having a comeback. Will this continue in the new year?
“It might last three months more, or it could go on for 12 months, but right now rotation is into biotech, healthcare, financials and large-cap tech” - financial analyst Howard Lindzon
Do analysts have their heads in the clouds?
In March, Salesforce saw its share price pop 21.88% to an all-time high of $166.95.
But what followed reflected this wider sector trend. In August, Salesforce slumped 16.3% off this high to a year-low of $139.72. For the year-to-date the share price has gained 19.3%, underperforming against the likes of the Invesco Dynamic Software ETF [PSJ] – which gained 33.9% in the same period of time – by close to a factor of two.
In December, Salesforce’s price has recovered almost to the March highs, reaching $161.96 at close 16 December. The company is currently valued at $142bn.
According to some, the share price could push past these record highs to set another all-time-high in the next few months. Its recent downtrend has created a new support level, according to Todd Gordon, founder of TradingAnalysis.com.
Although the First Trust Cloud Computing ETF has been underperforming the wider tech rally in 2019, when it comes to Salesforce “there’s something in the charts… that could indicate that we could see a bit of a catch-up here”, he told CNBC’s Trading Nation.
The cloud computing company has a full-year earnings forecast of $1.28 per share on the Nasdaq, considerably higher than the disappointing full-year earnings guidance it issued at the start of December of between $0.44 to $0.45 per share. It is also worth considering, as Investopedia reports, that Salesforce has beat earnings estimates for 11 consecutive quarters and currently has a swollen PE ratio of 134.22.
Furthermore, chairman and co-CEO of Salesforce Marc Benioff believes the company now looks set to double its revenue in the next five years. For its full-year guidance, the company forecasts a revenue jump of approximately 28% year-over-year to between $16.99 to $17bn.
Forecasted revenue increase year-over-year
Does Salesforce have spending issues?
As enterprise spending on tech from large companies has softened due to economic uncertainty, Salesforce has been edging into artificial intelligence tools as a way to reduce its revenue dependence on these large companies. This diversification effort may, however, have affected Salesforce’s margins.
On top of this, Salesforce has pursued an aggressive acquisition strategy in 2019. In June, in a bumper acquisition, the company bought Tableau for $15.7bn. However, this was not the only acquisition, throughout 2019 Salesforce has also purchased Griddable, MapAnything, Bonobo AI in May and most recently ClickSoftware Technologies.
In the wake of this spree, Salesforce has seen its operating margin decrease since the first quarter, and at 1.4% it’s almost half the 2.7% recorded in Q3 2019.
|PE ratio (TTM)||134.24|
|Quarterly Revenue Growth (YoY)||21.80%|
Salesforce share price vitals, Yahoo Finance, 18 December 2019
This diversification and acquisition strategy from Salesforce has given rise to a premium price that is more than eight times its revenues, which some may consider too much.
But, this does not appear to be deterring analysts. A consensus buy rating among 43 analysts on CNN, an indication that it is set for a strong showing in 2020.
Founder and CEO at Global Market Consultants, Richard Suttmeier, writing in Investopedia says that his technical analysis for the stock’s last nine monthly, semi-annual and annual closes suggests a strategy based on buying on weakness.
They “buy Salesforce shares on weakness to the monthly and semi-annual value levels at $154.91 and $150.80, respectively, and reduce holdings on strength to the weekly risky level at $166.27,” Suttmeier explains.