CRM with Nobias Technology: Case Study on Salesforce
From Saleforce’s (CRM) IPO in mid-2004 to the end of 2021, shares rose from $11.00 to the stock’s current 52-week high of $311.75. For years, CRM was a juggernaut in the growth stock space, enriching shareholders with market beating results. However, CRM shares have experienced much more bearish sentiment throughout 2022 thus far.
Highly valued growth stocks have plummeted this year as investors reduce risk in the face of uncertain macroeconomic conditions and rising interest rates. CRM shares have been caught up in the negative sentiment surrounding speculatively valued technology stocks, down by 27.62% on a year-to-date basis.
However, the stock reported earnings on 5/31/2022 and since then, shares have risen more than 15.5%. The company surprised analysts with its top and bottom-line results. And, while uncertainty still surrounds the markets, Salesforce continues to post strong growth results. During its most recent quarter, the company’s revenues rose by 24.3% on a y/y basis. This is an impressive feat for a large-cap stock like CRM (the stock’s current market capitalization is $159.27 billion.
Nobias 4-star rated author, Mike Robinson, covered CRM’s Q1 results in a recent article published at the Street Register. Robinson wrote, “Salesforce.com reported earnings per share at $0.98 for revenue $7.41B. Investing.com polled analysts and predicted EPS at $0.9444 for revenue $7.38B.” During its Q1 report, Salesforce highlighted its results, stating:
First Quarter Revenue of $7.41 Billion, up 24% Year-Over-Year, 26% in Constant Currency
Current Remaining Performance Obligation of $21.5 Billion, up 21% Year-Over-Year, 24% in Constant Currency
First Quarter Operating Cash Flow of $3.68 Billion, up 14% Year-Over-Year
Initiates Second Quarter FY23 Revenue Guidance of $7.69 Billion to $7.70 Billion, up ~21% Year-Over-Year
Updates Full Year FY23 Revenue Guidance to $31.7 Billion to $31.8 Billion, up ~20% Year-Over-Year
CRM CRM 2022
During the quarterly report, Salesforce’s Co-CEO, Marc Benioff, stated, “We had another great quarter, delivering $7.4 billion in revenue, up 24% year-over-year. There is no greater measure of our resilience and the momentum in our business than the $42 billion we have in remaining performance obligation, representing all future revenue under contract. While delivering incredible growth at scale, we’re committed to consistent margin expansion and cash flow growth as part of our long-term plan to drive both top and bottom line performance.”
With regard to its top-line results, the company stated, “Subscription and support revenues for the quarter were $6.86 billion, an increase of 24% year-over-year. Professional services and other revenues for the quarter were $0.56 billion, an increase of 30% year-over-year.”
The company also highlighted its cash position, stating, “Cash generated from operations for the first quarter was $3.68 billion, an increase of 14% year-over-year. Total cash, cash equivalents and marketable securities ended the first quarter at $13.50 billion.”
Salesforce updated its full-year fiscal 2023 guidance as well. The company is now calling for full-year sales of $31.7-$31.8 billion, which would represent year-over-year growth of approximately 20%. The company expects to see GAAP operating margin of 3.8% and non-GAAP operating margin of 20.4%. CRM expects to see “~21%-22%” operating cash flow growth. And, with all of this in mind, the company is calling for full-year non-GAAP earnings-per-share to total $4.74-$4.76 this fiscal year.
Will CRM’s Q1 results be the spark at ignites a rally back towards the company’s prior highs?
Only time will tell.
However, since CRM’s earnings release on May 31st, Nobias has seen a slew of credible analysts (only those with 4 and 5-star ratings) update their price targets and Buy/Sell/Hold opinions on shares, with the majority of these updates including bullish sentiment.
The website, theflyonthewall.com collates analyst reports. On 6/1/2022, the site highlighted an analyst report from Nobias 4-star rated Brad Zelnick, stating: “Deutsche Bank analyst Brad Zelnick lowered the firm's price target on Salesforce to $260 from $300 and keeps a Buy rating on the shares. The company last night reported better than expected fiscal Q1 results that exceeded on all relevant metrics, Zelnick tells investors in a research note. The analyst says "this was a solid beat and raise in a backdrop where others are missing and lowering."
Also, on 6/1/2022, in a report from Nobias 4-star rated analyst, Raimo Lenschow, stated: “Barclays analyst Raimo Lenschow raised the firm's price target on Salesforce to $218 from $208 and keeps an Overweight rating on the shares. The analyst believes Salesforce last night posted a "good enough" quarter when considering the lowered expectations from investors heading into the print. While there will be questions about the lowered fiscal 2023 sales guidance and some segments coming in below expectations, most of these issues could be traced back to currency and management "acting prudently here," says the analyst. He believes the business is "performing at a healthy pace and management commentary around end-demand appears to echo this."’
Nobias 4-star rated analyst, Michael Turrin, also published a post-earnings update on 6/1/2022. The Fly on the Wall covered the update, saying: “Wells Fargo analyst Michael Turrin raised the firm's price target on Salesforce to $235 from $225 and keeps an Overweight rating on the shares. The analyst notes Salesforce began 2023 with a consistent set of top-line metric. The Q2 guide calls for 15% growth in cRPO and 21% growth in total revenue, better than feared given investor concerns around the demand environment and scale/maturity of Salesforce, Turrin adds. While the top-line results remain largely consistent, the analyst believes the progress on margin is likely the greater focal point for investors, with management reiterating free cash flow guide of +24%-26% year-over-year, and raising the full year 2023 OM target by 40bps.”
Nobias 5-star rated analyst, Brent Bracelin, also raised his price target for Salesforce on 6/1/2022. The Fly on the Wall report stated: “Piper Sandler analyst Brent Bracelin lowered the firm's price target on Salesforce to $250 from $330 and keeps an Overweight rating on the shares. Last night's results "were solid given the audience of skeptics," Bracelin tells investors in a research note. The analyst is encouraged by the combination of a "better-than-feared" outlook, reaffirmation of the 20%-plus margin target even on lower revenue, and Salesforce's multi-cloud momentum.”
However, it is worth noting that not all credible analysts are equally as bullish. Nobias 4-star rated analyst, Yun Kim, from Loop Capital Ventures, noted that the firm was reducing its price target for Salesforce, from $225 to $175, in light of the company’s Q1 report. Kim maintains CRM as a “Hold”.
Nobias 4-star rated author, Vladimir Dimitrov recently published an article titled, “Salesforce Is Not Undervalued Yet” which also expresses a somewhat bearish sentiment for CRM shares. Dimitrov highlights CRM’s wonderful historical performance, but he doesn’t believe it was justified or sustainable. He wrote, “As Salesforce reached peak levels in the second halves of 2020 and 2021, many investors likely ascribed this superior performance to their unique ability to pick up the winners. Moreover, the optimistic picture about the future also resulted in expectations that CRM could continue to deliver similar returns well into the future.” “But,” he continued, “the reality was that this outstanding performance was not so caused by higher earnings, but rather by a massive increase in multiples.”
Dimitrov notes that CRM posted strong net income results in 2021; however, once again, he had qualms with those figures. The author stated, “The high net income figures in FY 2021 and 2022 were almost entirely driven by gains on strategic investments and one-time tax benefits.” He continues, saying, “Therefore, if CRM's outstanding returns were not driven by business fundamentals, what is left is that they were subject to exogenous factors.”
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.
Dimitrov stated, “Unfortunately, however, the real driver was fiscal and monetary intervention. The two periods of elevated P/S multiples we saw above also coincided with the periods when the Federal Reserve significantly expanded its balance sheet.” And, he concluded, “In a nutshell, Salesforce exceptionally strong performance up until the second half of 2021 was not caused by the company's outstanding business fundamentals, but rather by policy decisions made at the U.S. Federal Reserve.”
Being that the Fed is leaning hawkish right now with its economic policy stance, Dimitrov does not express a bullish outlook for CRM shares. He acknowledges the stock’s recent pullback, but writes, “following the recent decline CRM has become far less risky than it was when I first covered the company almost a year and a half ago. That is why I now change my rating from Bearish to Neutral.”
Overall, the bearish authors/analysts tracking CRM shares are in the minority, with regard to the individuals and firms followed by the Nobias algorithm. Right now, 86% of recent articles published on CRM shares have expressed “Bullish” sentiment. And, the average price target currently being applied to CRM by the credible Wall Street analysts that Nobias tracks is $234.19. This figure is well below the stock’s recent 52-week highs; however, relative to the company’s current share price of $184.91, it implies update potential of approximately 26.6%. Therefore, even after the stock’s recent 15%+ rally, according to the credible analyst that the Nobias algorithm tracks, CRM appears to have more room to run.
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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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.