CRM with Nobias technology: Salesforce: How Much Upside Is Left After A 25% Year-to-Date Rally?
The stock market has been on a bump ride during the last couple of weeks, due to bearish pressure being put on the major indexes by threats such as the Evergrande debt concerns coming out of China, the continued spread of the COVID-19 virus across the world, the speculation that the Federal Reserve may begin to make a hawkish turn with regard to monetary policy in the coming quarters, and due to the looming debt ceiling issue that has the potential to be catastrophic for markets if the United States government shuts down and it defaults on its debts. Needless to say, the combination of these concerns is enough to make even the most confident bull begin to experience anxiety. We’ve seen the market experience several negative weeks in a row now, with some of the year’s most volatile trading sessions happening this week alone. However, throughout this trying period of time, there has been a clear winner in the tech space. Salesforce (CRM) shares have risen nearly 13% since September 13th and we wanted to take a look at the shares to see what the highly rated analysts tracked by the Nobias algorithm have had to say about the company’s recent rally.
In early September, Nobias 5-star rated analyst, Nicholas Rossolillo, published an article titled, “3 Reasons Salesforce.com Stock Is a Buy After Q2 Earnings” highlighting his bullish outlook on CRM shares after the stock’s most recent earnings report. He began by highlighting the company’s record revenues saying, “Salesforce's revenue increased 23% year over year to $6.34 billion -- its first-ever quarter with over $6 billion in sales.”
Rossolillo pointed out that Salesforce’s recent activity in the M&A space is paying off for the company saying that, “Momentum is picking up, primarily because of the recent tie-up with Slack as well as the purchase of IT consulting firm Acumen Solutions, announced late in 2020. Slack and Acumen are expected to contribute $530 million and $200 million in revenue, respectively, during the second half of this year.”
Furthermore, while these sales figures are impressive, he notes that they make up a relatively small portion of CRM’s overall sales pie, which points towards the fact that the company’s existing business continues to generate strong double digit organic growth.
Rossolillo believes that this overall strength is likely to continue saying that, “Even when backing out recent takeovers, Salesforce is still growing at a high teens percentage rate, putting it on track to reach Benioff's [referring to CRM’s CEO Marc Benioff] goal of $50 billion in sales by fiscal year 2026 (which corresponds to calendar year 2025).”
With regard to Slack, Rossolillo said that “Salesforce has wasted no time making Slack the operating system for its Salesforce 360 CRM software suite.” He highlighted management’s bullish outlook for the continue integration of Slack’s technology into Salesforce’s broader suite of products saying, “As Benioff and his team referred to it on the earnings call, Slack -- as well as Zoom Video Communications ( ZM) -- are the new "digital HQ" for many organizations these days.”
Rossolillo concludes his piece saying that CRM is not only succeeding on the top-line, but on the bottom-line as well. He wrote: “Even when factoring in all the costs associated with Salesforce's acquisition-heavy strategy, this is still a highly profitable outfit. It raised its expected operating profit margin for full-year fiscal 2022 to a range of 14% to 15% (from the previous 12% to 13%). Excluding acquisition-related expenses, free cash flow generated through the first half of this year was $3.23 billion, up 75% from the same period last year and good for a free cash flow profit margin of 26%.” And therefore, Rossolillo believes that CRM shares continue to represent a potential “core holding” for investors’ portfolios, saying, “At about 48 times trailing-12-month free cash flow, I say Salesforce stock is still a fantastic buy. This cloud computing leader is growing at a brisk pace, highly profitable, and quickly going from a CRM software niche to the very fabric of operations for thousands of organizations around the globe.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
More recently, CRM shares have rallied higher, due to the September 23rd announcement that Salesforce management made regarding its full-year guidance. Jignesh Mehta, a Nobias 3-star rated news editor at Seeking Alpha, covered CRM’s press release saying, “Salesforce now sees FY22 revenue in the range of $26.25-26.35B from $26.2-26.3B vs. a consensus of $26.28B.” Mehta continued, saying, “For FY23, sees revenue between $31.65-31.80B vs. $31.45B consensus; Guides FY23 GAAP operating margin of approx 3.0% to 3.5%, and non-GAAP operating margin of 20.0%.”
This news sent shares higher to the tune of 7% on Thursday of this week. CRM continued its rally on Friday as well, up another 2.8%, more than making up for the stock’s participation in Monday's big market sell-off, closing the week up 6.72%, well above the S&P 500’s -0.55% weekly performance.
A number of highly respected Wall Street analysts raised their price targets on CRM shares because of the company’s guidance boost. Right now, the average analyst price target amongst the highly credible analysts that the Nobias algorithm tracks is $304.55. CRM shares closed the week trading at $285.63. This means that the average analyst price target implies upside potential of 6.6%. With this in mind, it makes sense that the majority of the credible authors that the Nobias algorithm tracks are bullish on CRM shares. Right now 81% of the credible authors that we follow express “Bullish” sentiment associated with Salesforce.
Since the start of August, there have been 15 analysts that Nobias tracks with 4 and 5-star ratings who’ve updated their price targets on CRM shares. 12 of these reports have been “Bullish”. 3 of the reports were “Neutral”. In short, it’s difficult to find a highly respected CRM bear on Wall Street right now, meaning that many of the individuals that we track share Rossolillo’s positive outlook.
Disclosure: Nicholas Ward is long CRM. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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