Salesforce Stock Climbs on Great Expectations
08/22/14 1:13 PM PT
Salesforce.com on Thursday reported a second-quarter loss of about 10 US cents per share -- but hey, who's counting? Not investors, apparently, who drove up the price of the CRM giant's stock 7.6 percent by market close Friday. Certainly not Wall Street analysts like Deutsche Bank, which promptly raised its target price for the company to $70.00 per share, pointing to a potential upside of 25.65 percent.
The reasons for their ongoing faith in the company reside partly in the underlying reason for its loss: Salesforce.com made several acquisitions in the quarter. Even more so, the optimism has to do with Salesforce.com's forecast for fiscal 2015, which exceeded analyst expectations.
Up, Up and Away
"I'm delighted to announce that we are once again raising our fiscal year 2015 revenue guidance by $30 million, to reach $5.37 billion at the high end of our range, which is a full year growth rate of 32 percent," said Chairman and CEO Marc Benioff. "We have now raised our fiscal 2015 revenue guidance by $170 million since we first initiated guidance last year."
Salesforce.com is not exactly a stock picker's top choice, though -- at least not this year. For various reasons, it has underperformed such benchmarks such as the S&P 500, Nasdaq and the technology sector of the S&P 500.
The company is losing money on a GAAP basis, said Eric Linser, a portfolio manager for Covestor.
It has a significant issue with deferred revenue, he told CRM Buyer, as it distorts free cash flow and obscures the true costs of fulfilling contracts yet to be completed.
Also, its valuations "by most metrics seem astronomical," Linser pointed out, "thus ripe for increased volatility and a sharp selloff should something go awry."
Leap Of Faith
It is the type of stock, in other words, that requires a certain leap of faith for investors who focus more on numbers than on a business case, Linser observed.
"I would say that Salesforce.com has a similar M.O. to that of Amazon.com -- having sky-high valuations that are difficult for many investors to get their arms around as they focus on growing their top line but not the bottom line," he said.
Salesforce.com reinvests to grow the company, Linser noted, and it doesn't "give a darn about the bottom line all that much, as of now. As an investor, either you accept and believe in what they are doing, or not."
That is not to say that Salesforce.com isn't hitting any marks -- it is. It is maintaining a 30 percent plus top line growth rate, which is impressive for a company doing nearly $5 billion in annual revenue, said Barry Randall, technology portfolio manager for Covestor.
All in all, "it was an excellent financial report," he told CRM Buyer.
Salesforce.com maintains a strong industry position, as no company has yet to truly challenge its dominance in the CRM space, Randall added. "Investors are getting the best of both worlds: outperformance right now, and profit headroom to outperform again for the balance of their fiscal year."
Analytics as a Service
The profit headroom may be larger than Salesforce.com is letting on. The company is poised to make some significant advances in the analytics and Big Data space that it is not including in its forecast, according to Trip Chowdhry, managing director of equity research at Global Equities Research.
"Salesforce.com is a very fast and innovative enterprise," he told CRM Buyer.
At this year's Dreamforce, Salesforce will unveil advanced Analytics as a Service offerings for both its sales and marketing clouds, Chowdhry noted. "Those will be very strong revenue catalysts."