Why Salesforce Stock Is Poised for Bigger Gains

Shares of Salesforce.com Inc. (CRM) have more than tripled in the last five years and are set to climb even higher. Expecting the cloud-computing solutions company to hit the high end of its forecast in what he describes as a “challenging quarter,” JMP Securities analyst Patrick Walravens recently raised his price target for the stock from $140 to $163, implying a 12% upside from Wednesday’s close. He mentioned that an industry source had told him that Salesforce is “firing on all cylinders,” according to Barron’s.

Stock/Index  Past 5-Year Performance
 Salesforce  249.8%
 Amazon  485.7%
 Microsoft  185.8%
 Alphabet  107.7%
 S&P 500  65.6%

Bright Outlook

The reason he thinks this will be a challenging quarter is because the company has already set a high bar for itself. Salesforce reported 27% growth in the same period a year ago following a 16% increase in the period one year previous to that. Obviously, the more you beat previous highs, the harder it becomes to keep doing it. (To read more, see: Salesforce Options Traders Bet Stock Will Rise 11%.)

But with corporate tech spending especially strong this year, the company is expected to benefit. Back in May, Morgan Stanley boosted its forecast for cloud-computing CAPEX growth for the year from 23% to 29%, according to a separate article from Barron’s. While some of that spending growth will go to competitors like Microsoft and SAP SE, Mizuho Securities analyst Abhey Lamba thinks Salesforce is the go-to company for the largest corporate customers, according to the Wall Street Journal.

Citing a range for the company’s billings (which includes both current revenue and changes in deferred revenue) outlook between $2.888 billion and $2.97 billion, Walravens thinks the company will report $2.96 billion in late August, up from his prior outlook of $2.93 billion. (To read more, see: Salesforce Seen Soaring Higher on Explosive Growth.)

Potential Obstacles

Of course, it should be kept in mind that some of that revenue and deferred revenue will come from its roughly $6 billion acquisition of cloud-software startup MuleSoft. Having acquired the company in May, this will be Salesforce’s first earnings report with MuleSoft on the books. The impact of the deal is still uncertain and thus one should expect “more room for variance” in the results, said RBC Capital Markets analyst Ross MacMillan at the end of May. He thinks the current fiscal year will be a bit of “reset/digestion year.”

One of the main worries for Salesforce is its current lofty valuation. Having recently just reached the $100 billion market capitalization club, the company trades at a forward price to earnings ratio (P/E ratio) of 53.37, more than double the forward multiple of 17.22 of the S&P 500 and 21.05 of the Nasdaq 100. Expected to only generate $2.6 billion in free cash flow for this fiscal year, that’s a lofty valuation indeed. But, it’s all based on the expectation that those cash flows will rise quickly in coming years.

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