Key Points
- Salesforce.com shares surge on strong results and positive outlook.
- Revenue is in line with expectations, while margins are widening and profits are impressive.
- Share repurchases are increasing year over year and expected to continue supporting the market over time.
- 5 stocks we like better than Salesforce
Salesforce.com NYSE: CRM has been a challenging trade over the past year or two. The stock price came under pressure following the pandemic bubble, and concerns about slowing growth amplified the impact. However, the company’s better-than-expected results have led to multiple buy-the-dip opportunities in 2022 and 2023, ultimately paying off.
The Q3 results, including better-than-expected margins and increased profit guidance, propelled the stock price up 10% to a multiyear high, confirming a complete reversal.
Stock market reversals can be difficult to trade. However, in this case, the completion of the bottoming pattern has opened the door to a $100 increase in share prices, derived from the magnitude of the pattern, a Head & Shoulders worth $100, and projected to the break-out point. This puts the market at $330, an all-time high above the analysts’ highest price target.
Salesforce.com has a mixed quarter; investors cheer
Salesforce.com had a mixed quarter relative to analysts’ expectations, but the overall news is positive. The company reported $8.72 billion in net revenue, a gain of 11.2% over last year. While the revenue was as expected, it was accompanied by wider margins. Revenue growth was driven by a 13% increase in subscriptions and services, offset by a 4% decline in the Pro category. The company’s business strength is supported by its focus on AI, and it is now the 4th largest SaaS company by revenue and the #1 AI-powered business service/CRM.
What impressed the market the most was the margin news. The company reported a 31.2% adjusted operating margin, up 850 basis points compared to last year. The margin gains are attributed to sales leverage, internal AI-powered efficiency, and pricing increases enacted during the quarter. This led to an adjusted EPS of $2.11, beating expectations by 250 basis points and growing 50% year over year.
The guidance is also strong, with revenue and earnings forecasts exceeding consensus estimates. This has already led to analysts raising their estimates, and the guidance may be conservative. The company’s RPO is also on the rise, with current RPO up 14% compared to last year’s increase of 11%, and total RPO up 21%.
Capital returns remain solid for CRM investors
While Salesforce.com doesn’t pay dividends, it does repurchase shares. The company repurchased $1.9 billion of shares in Q3 F2024, a nearly 12% increase compared to last year’s Q3. Although the company’s cash flow and FCF were insufficient to cover the purchases, it did not harm the company’s financials. The net result of year-to-date operations is a reduction in assets offset by a reduction in debt and a 1.9% reduction in share count. The balance sheet remains solid with a cash balance of $6.4 billion, $2.5 billion in net debt, and leverage below 2X shareholder equity.
Analysts have yet to issue updates or revisions, but they are on the way. Until then, the analysts rated this stock as a Moderate Buy and have been driving it higher all year. This year’s price target revisions have the consensus target up 12% compared to last year, and it is likely to trend even higher now. The latest targets have the market trading in the high-end range, near $260 to $280, representing a 12% gain on top of the post-release price action for this tech stock.
The technical outlook: Salesforce.com completes the reversal
The price action in CRM shares formed a Head & Shoulders bottom over the past 24 months and confirmed the pattern as a full reversal. The post-release price action has led to a 10% increase in the market, breaking to new highs above the pattern’s neckline, and supported by MACD and stochastic indicators. These indicators show a strong buy signal with momentum swinging to the upside and stochastic firing a bullish crossover high in the range. The stock may pull back before continuing higher, providing another buy-the-dip opportunity.
While Salesforce currently has a “Moderate Buy” rating among analysts, top-rated analysts believe these five stocks are better buys.
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