Salesforce.com Is Making a Killing: Can the Momentum Continue?
Salesforce.com (NYSE:CRM) has offered shareholders massive returns over the last few years. In truth, it’s a stock that I wish I had bought — several times, actually. The stock has made huge gains in recent years, but often falls hard on bad news. Although the stock has quadrupled in a few years, perhaps it is still worth buying. You may not have missed the boat on this one. This is because the stock is volatile. If you wait patiently for a day or a week where this stock gets hammered, you can probably get in.
So, for those who do not know this company, it provides enterprise cloud computing solutions to various businesses and industries worldwide. It also offers social and mobile cloud apps and platform services. It offers something called Service Cloud that enables companies to connect with customers and address service and support needs as well as a Marketing Cloud, which enables companies to bring in data from any source and deliver personalized interactions to any customer across any channel through email, mobile, social, web, marketing automation, and data analytics from a single platform. It also sells the Salesforce1 Platform, a cloud platform for developing customer apps. To understand if the stock is a buy moving forward after a selloff, a discussion of the company’s most recent earnings is warranted.
Let’s face facts here: the company makes a killing. Its revenue growth has driven shares so high. But can it continue? I think so. This is because the year-over-year growth is phenomenal. Total revenue was $1.23 billion, an increase of 37 percent year-over-year. Subscription and support revenues were $1.15 billion, an increase of 36 percent year-over-year. Professional services and other revenues were $79 million, an increase of 58 percent year-over-year. However, the company does lose money on a GAAP basis. Diluted GAAP loss per share was ($0.16), and diluted non-GAAP earnings per share was $0.11. Cash generated from operations for the fiscal first-quarter was $473 million, an increase of 67 percent year-over-year. Total cash, cash equivalents, and marketable securities finished the quarter at $1.53 billion.
There is no doubt that the quarterly growth is impressive. But the question for investors is will the stock follow-suit and rise as well? I think it is quite possible because revenue for the company’s second fiscal quarter is projected to be in the range of $1.285 billion to $1.290 billion, an increase of 34 percent to 35 percent year-over-year. Diluted non-GAAP earnings per share is expected to be in the range of $0.11 to $0.12. While revenue is growing, the company is cutting losses on the path to sustainable earnings, and it is a difficult stock to value properly.
In fact, in many cases it is a headline driven stock. That is, news drives share prices up or down significantly more than the average company. It is also a momentum name. I see the momentum continuing because the stock continues to move ever higher each year. But in order to do this, the company needs to keep delivering. Look at Oracle Company. It has realized the importance of cloud based growth. But Salesforce.com is the big player here. I see shares moving higher as the company has raised guidance. Revenue for the company’s full fiscal year 2015 is projected to be in the range of $5.30 billion to $5.34 billion, an increase of 30 percent to 31 percent year-over-year. Diluted non-GAAP earnings are expected to be in the range of $0.49 to $0.51. Given the continued momentum, I think if we see a large pullback in the stock this summer it will be a buy going forward.
Disclosure: Christopher F. Davis holds no position in Salesforce.com and has no plans to initiate a position in the next 72 hours. He has a tentative buy rating on the stock and a $64 price target.