Why Beaten Down Salesforce Will Stage a Major Rebound

Cloud computing industry pioneer Salesforce.com Inc. (CRM) down nearly 15% off its highs amid the broader tech stock downdraft, is positioned to rebound by more than 30%, according to one team of bulls on the Street, and as outlined by Barron's

Investors looking for a solid play amid an increasingly volatile market, in which recent sell-offs have weighed heavily on some of America's largest tech companies, should look to cloud service industry leader Salesforce, wrote analysts at Nomura Instinet in a recent research note. 

What Will Drive Salesforce's Rebound

Dominates more than 30% of the $16 billion cloud sales market
Total market will grow 11% annually through 2022
Company's top 10 customers are spending double from four years ago

CRM a 'Core Long-Term Holding in the Software Space'

Nomura Instinet analyst Christopher Eberle recommended buying shares of San Francisco-based cloud-based sales software giant Salesforce while the stock trades at a discount. While CRM shares are already up 34.3% YTD, compared to the tech-focused Nasdaq Composite Index's 5.8% return and the S&P 500's 1.4% increase, Eberle's 12-month forecast of $181 implies another near 32% upside from Wednesday close. 

Big Upside For Salesforce

Wednesday closing price: $137.24
Nomura price target: $181
Upside: 31.9%

"Salesforce’s breadth and depth of products combined with its maniacal customer focus, recurring revenue model, and strategic value to its customers make CRM a core long-term holding in the software space," wrote Eberle. 

The Salesforce bull cited the company's dominance in the cloud sales market, in which it controls a more than 30% share of $16 billion in annual sales. Nomura expects Salesforce's total addressable market to increase by 11% per year through 2022. Meanwhile, Salesforce's top 10 largest customers are spending double on Salesforce's services compared to just four years ago, wrote Eberle. He views this huge jump in spending by key clients as representing more opportunities to upsell current customers.

The Nomura Instinet analyst also applauded Salesforce's improving operating profit margins, up from 10.7% in fiscal 2015 to an estimated 17% in fiscal 2019. Moving forward, Eberle expects the metric to rise by 1.2% to 1.5% per year. 

What's Next

Positive tailwinds aside, investors should consider risks including a weakened outlook for the once high-flying tech sector at large and heightened competition in the cloud space. 

Salesforce is slated to report its most recent quarterly report on Nov. 20. Investors will keep an eye on whether the cloud titan can continue to impress the Street with strong growth following a blowout earnings report in Q2. 

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