Despite the digital transformation that has been accelerated by the coronavirus pandemic, Salesforce's [CRM] share price was slow to recover from the mid-March market slump. Could third-quarter earnings, due 1 December, help the stock hit a new record high?
On 20 February, Salesforce's share price reached a new peak when it closed at $193.36, but it went on to fall 23.6% year-to-date to $124.30 on 16 March, marking the stock’s worst day of trading this year.
It took Salesforce’s share price nearly two months to get back into the green, closing at $163.25 on 5 May (up 0.38% year-to-date). However, it wasn’t until 6 July that Salesforce’s share price managed to surpass its February peak, when it closed at $197.72.
Salesforce’s share price went on to soar following its second-quarter results on 25 August. Its incorporation into the Dow Jones Industrial Average on 31 August helped the stock surge to its highest-ever close of $281.25 on 1 September — up 68.42% year-to-date.
However, Salesforce’s share price has since taken a tumble, falling to $232 27 on 30 October, its lowest close since the September peak. As of 27 November’s $247.63 close, Salesforce’s share price was up 52.3% year-to-date, but still circa 12% below its peak.
Can Salesforce produce another earnings beat?
When Salesforce released its Q2 earnings report on 25 August, it announced non-GAAP earnings of $1.44 per share, marking an incredible growth of 118% year-over-year and beating the Zacks consensus estimate of $0.67 by 114.9%.
Revenues, on the other hand, had climbed 29% year-on-year to $5.15bn, beating analysts’ predictions of $4.9bn by 5.1%.
Salesforce's Q2 revenue - a 29% YoY rise
The day after the report, Salesforce’s share price surged 26% to close at $272.32 on 26 August, up 67.4% year-to-date.
Looking ahead to the next results, analysts expect Salesforce to post earnings per share of $0.74, a potential 1.3% decline from the same period last year. On the other hand, revenues are expected to come in at $5.24bn, which would mark a growth of 16.4% from last year’s Q3.
For the full year, Salesforce is expected to make earnings of $3.74 per share and revenues of $20.77bn, which would mark respective growths of 25% and 21.5% year-over-year.
“[Salesforce] expects its revenue to rise 21%-22% this year, and for its adjusted EPS to grow 24%-25% — even as it ramps up its investments and spending in the third and fourth quarters,” Leo Sun, wrote in The Motley Fool.
“[Salesforce] expects its revenue to rise 21%-22% this year, and for its adjusted EPS to grow 24%-25% — even as it ramps up its investments and spending in the third and fourth quarters” - Leo Sun
Is Salesforce a Buy?
Michael Turits, analyst at KeyBanc, initiated coverage of Salesforce with an Overweight rating and price target of $310, according to The Fly. The bullish analyst had a positive view on the stock as a “core growth-software holding, with a dominant 20% share in CRM ‘front office’ applications”.
Turits also believes Salesforce's share price growth is being driven by applications’ ongoing shift to cloud, while the digital transformation is accelerated by COVID-19 and the wide adoption of working from home.
“Salesforce's stock might initially seem expensive at 70 times forward earnings, but it's actually much cheaper than many of its cloud service peers,” Sun wrote. “It's also one of the few high-growth cloud companies that generates consistent profits.”
“Salesforce's stock might initially seem expensive at 70 times forward earnings, but it's actually much cheaper than many of its cloud service peers. It's also one of the few high-growth cloud companies that generates consistent profits” - Leo Sun
Zacks has given Salesforce a Hold ranking, while the current consensus among 44 analysts polled by CNN Money is to buy. This comes from a large majority of 33 analysts, compared to three that gave an Outperform rating, seven that gave a Hold and just one that gave a Sell.
Among the 40 analysts offering 12-month share price forecasts, also polled by CNN Money, the median price target sits at $285, although some estimates suggest Salesforce’s share price could rise as high as $344. The median estimate would represent increases of 15% on Salesforce’s share price as of close on 27 November.