(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Salesforce.com Inc. (CRM) shares have soared 48% during the past year, and their valuation, at 46 times earnings, would appear to make them too rich to rise higher. But analysts and traders see more upside. Options traders are betting the stock will rise by nearly 11% by early 2019 from its current price of $122.80, based on analysis. Including the stock's 20% increase thus far this year, that would amount to a total gain of 33% between January of this year and when the options expire. The confidence about Salesforce comes as investors are expecting substantial revenue and earnings growth.
Options traders are wagering hefty bets that shares of the software company continue to rise, using the options set to expire on Jan. 18, 2019. The $125 calls have nearly 8,600 open contracts, while the puts have just 320 contracts, the wager on the calls is over $9 million, significant bets for the length of time until expiration. The options trade at nearly $11 per contract, and that means the stock would need to rise above $136 for the options to be profitable, a jump of 11%.
Bulls Have Been Building
The number of bets for the $125 calls has been steadily rising since the beginning of the year, and in some cases, the values for the options were more expensive than presently, a sign that bullish sentiment is relatively new, and traders still see prices rising.
Wide Trading Range
The long straddle options strategy is implying that shares of the stock rise or fall by nearly 18% from the $120 strike price. The calls heavily outweigh the puts at the strike price, with almost 3,000 open calls to only 620 open puts. It places the stock in a massive trading range by the time expiration comes around in January of approximately of $98 to $142. The number of open calls to puts suggests that options traders are looking for shares to rise over the next 10 months.
Option traders' bets likely stem from the positive outlook analysts have on the stock, with earnings expected to climb by 67% in fiscal 2019 to $2.26 per share on revenue growth of nearly 22% to $12.74 billion. Meanwhile, almost 91% of the 45 analysts covering the stock rate shares a with a buy or outperform rating. The average analyst price target on the stock is at $137.26, 12% higher than its current price.
Some traders are betting shares will fall, with nearly 6,700 put contracts at the $90 strike, the dollar value is small at roughly $1.2 million. Meanwhile, shares are not cheap, trading at 46 times fiscal 2020 earnings estimates of $2.69 per share, while the blistering earnings growth rate of 2019 is expected to slow to 19% in 2020.
For now, the bulls are betting that Salesforce will continue to build on a hot start to 2018. Now all that is left is for the company to deliver the results that justify the optimism.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.