Does Salesforce Support Higher Prices?

With shares of Salesforce (NYSE:CRM) trading around $47, is CRM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Salesforce is a provider of enterprise cloud computing and social enterprise solutions. The company provides a customer and collaboration relationship management applications through the Internet or cloud. Salesforce delivers its service through Internet browsers and mobile devices and markets its social enterprise applications and platforms to businesses on a subscription basis. Cloud computing — the use of Internet-based computing, storage, and connectivity technology to deliver a variety of different services — has generated a lot of buzz in recent years. Many companies and consumers are adopting this technology due to its increased efficiency and the possibilities it offers. As a cloud computing leader, look for Salesforce to lead this technology to become a staple for consumers and companies.

T = Technicals on the Stock Chart are Mixed

Salesforce stock has seen a consistent uptrend since establishing lows during the 2008 Financial Crisis. The stock is now consolidating slightly below all-time high prices. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Salesforce is trading above its rising key averages which signal neutral to bullish price action in the near-term.

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CRM

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Salesforce options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Salesforce Options

41.82%

73%

71%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Salesforce’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Salesforce look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-433%

-5066%

-133%

-1400%

Revenue Growth (Y-O-Y)

32.09%

34.94%

34%

37.89%

Earnings Reaction

7.55%

8.82%

1.2%

8.8%

Salesforce has seen decreasing earnings and increasing revenue over the last four quarters. From these figures, the markets have been excited about Salesforce’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Salesforce stock done relative to its peers, Oracle (NASDAQ:ORCL), Sap (NYSE:SAP), Microsoft (NASDAQ:MSFT), and sector?

Salesforce

Oracle

Sap

Microsoft

Sector

Year-to-Date Return

6.96%

1.74%

2.20%

26.06%

5.86%

Salesforce has been a relative performance leader, year-to-date.

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Conclusion

Salesforce is a leading provider of cloud computing and CRM technology to companies and consumers worldwide. The stock has had an explosive move higher over the last several years and is now trading at all-time high prices. Earnings have been decreasing while revenues have been increasing over the last four quarters. This has led to excited investors who have bid the stock higher. Relative to its peers and sector, Salesforce has been a year-to-date performance leader. Look for Salesforce to OUTPERFORM.

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