Less than two weeks ago, David Tepper’s Appaloosa hedge fund disclosed that it had acquired a new position (200K shares) in Salesforce (CRM) . The stock dipped to the mid-$150s twice in the second quarter, and once more in July. Wonder where the Appaloosa started. Regardless, that’s good company to be in.
I’ve sold some Salesforce, and I’ve bought some Salesforce this year, but I’ve never been “flat”, at least not this year. Salesforce and Microsoft (MSFT) are the only two software stocks, or “cloud kings” that I hold some sort of perpetual position on because the market has done what it has done. I am also, at the moment, long ServiceNow (NOW) , but I often go in and out of that name. Salesforce, by the way, is reporting late today, after the closing bell.
Ring that Bell
Salesforce shareholders expect the company to release its fiscal second quarter results on Wednesday afternoon. For the company’s fiscal first quarter, Salesforce reported adjusted EPS of $0.98 (GAAP EPS: $0.03) on revenue of $7.41B. These numbers beat Wall Street projections for both top and bottom line results, while the top line itself showed year-over-year growth of 24%, or 26% in constant currency. A large portion of the EPS adjustment came from stock-based compensation expenses.
At the end of that first quarter, outstanding performance obligations increased 21% (24% in constant currency) to $21.5B. The company also guided Q2 to revenue of $7.60 to $7.7B and the full fiscal year to revenue of $31.7B to $31.8B. Those numbers, if realized tonight, would be good for growth of 21% and 20%, respectively. Salesforce also guided Q2 adjusted EPS to $1.01 to $1.02 and full-year adjusted EPS to $4.74 to $4.76.
What to Expect
As of tonight, the consensus of more than 35 analysts is for adjusted EPS of $1.03 on revenue of $7.7B. All eyeballs tonight will be on the Subscription and Support business. That business is, at the moment, the company’s main source of income. Subscription and Support posted revenue of $6.856B for Q1, up 23.8%. This is where the magic happens, so to speak. This is where clients looking to digitize data and move operations to the cloud, go to do just that. The demand for these services is here to stay.
That said, with the macro backdrop this way, and tech firm after tech firm announcing either reduced payrolls or hiring freezes, it’s logical that there is risk associated with this quarter. in particular, regarding corporate IT spending. Second, investors will also need to focus on Professional Services and Other businesses. This unit only brought in $555M in revenue back in the first quarter, but that was up a whopping 29.9%.
Operating margin will also be a focus. For the first quarter, the adjusted operating margin came in at 17.6%. At the time, Salesforce raised its guidance for full-year adjusted operating margin to 20.4%, but left a relatively large blank on this item for the quarter reported this afternoon. I think the market will take it very well if it looks like the operating margin is moving towards the full year guidance number. Conversely, if the firm is forced tonight to cut that guidance, the market will react with anger.
Funds
Cash from operations totaled $3.676B in Q1, resulting in free cash flow for the quarter of $3.53 per share, nearly double the prior quarter. This left a net cash position of $13.503B on the balance sheet, and current assets of $20.441B. Current liabilities totaled $19.899B, including $1.002B in debt labeled current. That puts the current ratio at 1.03, and while not exactly stable, that’s like squeaking. Consider it a C+.
Total assets add up to $93.022B. This includes a whopping $56.878B in “goodwill” and other intangibles. That’s 61.1% of total assets, and that’s more than a little in my opinion. Total liabilities less equity amount to $34.146B, including $9.595B in long-term debt.
The truth is that it’s easy to dislike a balance sheet with a current ratio that barely gets a passing grade, and it’s easy to dislike a balance sheet where 61% of all assets are invisible. Know what? It’s really easy to like a balance where the cash position is sufficient to pay off the entire debt-load if needed. Oh, and the company’s tangible book value at the time, hit $2.01 per share, the strongest it’s been in a year.
The Chart
The stock is not cheap at 37 times forward looking earnings. That can be reason to take a pass. I chose to ignore the appreciation for now. Salesforce has earnings with a neutral reading for Relative Strength, and a soft looking daily MACD. Readers will note that CRM broke out of a seven-month downtrend in June and moved into a basing pattern that has now lasted nearly five months. (There is about a six-week overlap between the two patterns.)
The stock recently gave up its 21-day EMA, causing the swing trading crowd to cut bait. Currently, CRM is in contact for several days battling for its 50 day SMA. Lose that line, and you lose some portfolio managers. again. Hold that line, and well, that depends on the profits, now doesn’t it?
CRM is currently running with a $194 pivot. Take the pivot, and the stock could trade as high as $232. Just my opinion. My panic point moved to $163, which is an 8% discount to the 50 day SMA.
Bullish Trade Idea (minimum lots)
– Buy 100 shares of CRM at or near $177.
– Sell a CRM September 16 $190 call for about $4.
– Sell a CRM on September 16th $167.50 put at $5.50.
Net Basis: $167.50.
Best case? The investor is called at expiration for a net return of 13.4%.
Worst Case? The investor ends up long 200 shares on a net basis still at $167.50, with CRM trading below that level.
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