Salesforce Stock Up 4% Today – Time to Buy CRM Stock?

Salesforce stock is jumping 4% this morning in pre-market stock trading action after the company reported its financial results covering the fourth quarter of the 2022 fiscal year as it beat both earnings and revenue estimates from Wall Street for the period.

For the three months ended on 31 January, Salesforce reported record revenues of $7.33 billion resulting in a 27% year-on-year jump in constant currency to end the year with total sales of $26.49 billion. The consensus estimate for the company’s Q4 sales stood at $7.24 billion.

Subscription and support revenues ended at $6.83 billion or 24.6% higher than the fourth quarter of the previous year while professional services and other revenues ended at $498 million compared to $341 million reported a year ago.

GAAP operating losses ended at $176 million compared to an operating profit of $193 million Salesforce reported a year ago. As a result, GAAP operating margins declined to minus 2.4% compared to positive 3.3% the previous year. However, on an adjusted basis, operating margins ended at 15% or 250 basis points higher than a year ago after adding back non-cash expenditures such as stock-based compensation.

GAAP diluted losses per share stood at $0.03 compared to a positive $0.28 figure reported a year ago while adjusted EPS fell 20 cents to $0.84 per share. This figure was 9 cents ahead of the Street’s consensus estimate.

For the next quarter, Salesforce expects to report revenues of up to $7.38 billion and adjusted earnings per share of up to $0.94. Both figures exceeded the consensus forecast for the quarter.

The combination of a strong quarterly report and better-than-expect next quarter’s guidance is possibly the reason why Salesforce stock is jumping in pre-market activity.

What could be expected from this tech stock after this earnings report? In this article, I’ll be assessing the price action and fundamentals of CRM stock to outline plausible scenarios for the future.

67% of all retail investor accounts lose money when trading CFDs with this provider.

Salesforce Stock – Technical Analysis

Back in January when I last wrote about Salesforce, I mentioned that technical indicators favored a bearish outlook for the stock after CRM was downgraded by analysts at UBS.

Back then, the stock was trading at $228 per share and went on to decline to $184 at some point this month as Treasury yields kept climbing until reaching the 2% level.

However, shares have bounced along with the entire tech sector as market participants appear to believe that the Federal Reserve could postpone some of its decisions concerning monetary policy amid the current geopolitical situation.

10-year US Treasury yields have given up at nearly 31 basis points after hitting a post-pandemic high of 2.065% and that has allowed equities – especially those in the tech sector – to take a breather after the pronounced decline they suffered in the past few months.

Today’s positive earnings report and this apparent change in the market’s sentiment – at least for now – could favor a short-term bullish outlook for CRM stock.

If today’s pre-market uptick spills over to the live session, the price will break the falling wedge pattern shown in the chart above. If that happens, the next resistance will be found at around $235 per share which means that there’s an 11% short-term upside potential.

Momentum indicators are favoring this view as pronounced bullish divergences have popped up in both the Relative Strength Index (RSI) and the MACD, with the two indicators making higher lows despite the price moving lower.

Salesforce Stock – Fundamental Analysis

Despite how much Salesforce has managed to scale its sales, the company is still unable to generate decent GAAP profit margins amid its elevated stock-based compensation expenditures.

For the 2023 fiscal year, Salesforce expects to report a thin GAAP operating margin of 3.6% along with an adjusted margin of 20% after adding back an eye-popping 10.4% coming from stock-based compensation alone.

Arguably, this can hardly be considered a non-recurring or extraordinary expense as the company needs it to run its regular operations. This year alone, the company’s fully diluted share count increased 4.7% to 974 million.

In any case, the business’s thin GAAP operating margins are still a concern and that could be the reason why Salesforce is trading at just 6 times its forecasted revenues for the year.

The company produced around $5.3 billion in free cash flows last year and invested a sizable amount – around $16.5 billion – in acquisitions and other similar investments. If FCF margins remain the same during the 2023 fiscal year at around 21%, the company will produce free cash flows of around $6.7 billion resulting in a forward P/FCF ratio of 31x.

This ratio seems rather higher unless the company manages to increase this margin significantly in the future as sales are expected to grow by an average of 20% in the next few years.

With this in mind, from a fundamental standpoint, Salesforce stock could still be relatively undervalued and that creates room for further negative volatility if market sentiment continues to deteriorate in the following weeks or months.

Buy CRM Stock at eToro with 0% Commission Now!