Salesforce Seen Falling 11% Amid Signs of Weakness

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.) Inc.'s (CRM) stock has skyrocketed by nearly 60% over the past year, easily beating the S&P 500 return of just 15.5%. But the stock may be in for a rough ride, with shares pulling back by about 11% based on technical analysis. 

The outlook for the company over the longer-term looks strong, with analysts forecasting strong revenue and earnings growth for the coming quarter and year.

Bearish Chart

The technical charts suggest the stock is due to fall by about 11% from its current price around $144.40. The stock stalled out at roughly $149 and is now hovering near a technical uptrend. Should the stock fall below that uptrend; shares could drop to a technical support level of $128. 

Another bearish indicator is that volume levels for the stock have declined since the end of June as shares were rising, suggesting buying interest may be tiring out. Additionally, when volume levels did spike at the end of July, it was when shares fell sharply from $148 to $135. Furthermore, the relative strength index has also started trending lower, breaking its previous uptrend, another contrary indication. 

Strong Growth

Even if shares do pullback over the short term, the outlook for the business is still solid. Analysts are forecasting fiscal second-quarter 2019 earnings to grow by more than 42%, while revenue is seen climbing by more than 26%. The full-year outlook is forecast to be even stronger, with analysts looking for earnings to grow by more than 71%, with revenue seen rising by more than 25%.

But that is not to say all is rosy, because earnings growth is expected to fall substantially in 2020, to just 20%, and then re-accelerate in 2121 to more than 28%. Revenue growth is expected to remain consistent at roughly 18 to 20% over the next two years. Shares do not come cheap, trading at approximately 53 times 2020 fiscal earnings estimates of $2.71.

CRM Quarterly Revenue Estimates Chart

CRM Quarterly Revenue Estimates data by YCharts

Not Much Upside

Despite the bullish outlook for earnings and revenue growth this year, analysts aren't looking for shares to rise much higher from the stock’s current price, just 5%. The average analyst's price target on the stock is only $151.33, and those targets have been revised higher by about 10% since the start of May. (For more, see also: What Is So Hot About Salesforce?)

CRM Price Target Chart

CRM Price Target data by YCharts

Although there are signs emerging a pullback may be on the way, the long-term business outlook for the stock still looks strong. But with shares trading at lofty levels, the company will still need to drive revenue and earnings higher for shares to keep rising over the longer-term. 

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. 

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