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Will Salesforce’s share price hold after Q2 earnings?

The Salesforce [CRM] share price gained 15.1% in 2021 to close 20 August at $256.13. However, this figure means that the Salesforce share price has lagged behind the S&P 500, which gained 18.3% in the same period.

Until 16 February, the Salesforce share price appeared to be in a position of strength, with gains of 11.7% in the year-to-date, leading it to a $248.59 close. However, the Salesforce share price then fell 17.4% to close 4 March at $205.33. A recovery over the next two months saw the Salesforce share price close 28 April at $236.88, before crashing 11.1% in a fortnight to close 12 May at $210.54. 

However, the Salesforce share price has been on a strong run since, and the 20 August close sees it 22.3% up over the trailing 12 months.

 

 

The gains seen in the year so far are a culmination of several years of high-revenue growth combined with steadily increasing net income.

 

High volatility

Like most tech and software-as-a-service (SaaS) companies, Salesforce is a growth stock and displays volatility of 1.30, making it twice as volatile as the Dow Jones, according to Macroaxis. 

This means there is potential for a surprising set of results to have a big impact on the Salesforce share price when second-quarter 2021 earnings are announced after markets close on 25 August. 

 

Margin pressure ahead

According to Zacks Equity Research, analysts expect Salesforce’s sales growth to continue. However, net income might be about to take a hit.

The consensus sales estimate of $6.23bn would mark a healthy 20.1% increase year-over-year if the prediction is accurate. However, the consensus EPS estimate of $0.91 would be a fall of 36.8% year-over-year. 

CNN Money’s panel yields broadly similar predictions, with consensus sales and EPS estimates of $6.2bn and $0.92, respectively.

While the most optimistic estimate among the Zacks panel was EPS of $0.92, the high estimate among CNN analysts was $1.05. However, even this figure earnings are expected to fall 27.1% since last year’s equivalent figure of $1.44. 

Patrick Walravens, an analyst at JMP, was bullish about Salesforce’s prospects. On 18 August, Walravens raised the price target for Salesforce from $282 to $320 and increased Q2 revenue estimate from $6.23bn to $6.24bn. The research note compared Salesforce’s 11% gains in the year-to-date and with the Nasdaq’s 14%. Walravens anticipates full-year 2022 EPS of $3.83, which would imply a 22.2% fall in earnings over the previous year’s total of $4.92.

 

Past surprises

Salesforce could yet deliver a surprise for investors. The previous two quarters’ reported earnings both exceeded analysts’ expectations by more than 37%. The two quarters before saw earnings more than double analysts’ expectations.

Last quarter’s reported EPS of $1.21 far exceeded the $0.88 that was expected. Should the upcoming earnings announcement contain a surprise of this magnitude, the predicted EPS of $1.24 would be just 13.9% down year-over-year and would likely prompt a significant uptick in the Salesforce share price.

“Our impressive start to this year helps fuel our momentum for the rest of the year as we keep pace toward our goal of $50bn in revenue in FY26” - my Weaver, president & CFO of Salesforce

 

After the last quarter’s earnings were reported in May, Marc Benioff, chair and CEO of Salesforce, described it as “the best first quarter in our company’s history”.

Amy Weaver, president and CFO of Salesforce, added: “Our impressive start to this year helps fuel our momentum for the rest of the year as we keep pace toward our goal of $50bn in revenue in FY26.” The Salesforce share price climbed 5.4% on 28 May, the day following the post-market close earnings announcement.

 

Funds to watch

Salesforce is the third-largest holding in the iShares Expanded Tech-Software Sector ETF [IGV], with an 8.61% weighting as of 20 August. Gains in the Salesforce share price helped the fund gain 15.5% in 2021 to this date, and 34.3% over the trailing 12 months.

In the year-to-date, IGV’s performance almost exactly matches that of the Capital Link NextGen Protocol ETF [KOIN], an indexed fund which tracks fintech companies. As a digital asset provider, Salesforce is held by the fund: it was KOIN’s sixth-largest holding with 3.92% of net assets as of 19 August. KOIN trails IGV over the past 12 months with gains of 29.1%.

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