(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Salesforce.com Inc.'s (CRM) stock has hit record highs after rising nearly 20 percent since bottoming on February 8. A technical analysis of the chart suggests the stock may have gotten ahead of itself and could be setting up for a pullback of up to 12 percent from its current price of approximately $124.40.
The cloud-based customer relationship management platform narrowly beat analysts' estimates when it reported results on February 28. The company reported fourth-quarter revenue of $2.851 billion, about 1.3 percent better than estimates, while earnings came in at $0.35 a share, about 3.8 percent ahead of expectations.
Outside Of The Trading Channel
The daily chart shows that the stock has traded in a relatively tight trading channel since January 2017. Salesforce stock recently crossed above the top end of the channel, which could be a contrary indicator.
The previous times the stock rose to the high end of the channel, it was followed by a pullback or a period of sideways consolidation. Additionally, a gap was created on February 15, and should shares look to refill that gap, it could lead to a decline of roughly 12.5 percent to approximately $109. However, should the stock experience a shallow drop, it may fall only 8 percent, to roughly $114.20.
The daily chart also shows a relative strength index (RSI) reading that is overbought at 74. A reading over 70 is an indication the stock is overbought. Additionally, the RSI has been trending lower since early November 2017, while the stock was rising, a bearish divergence. (See also: What Is the Advantage of Using the Relative Strength Index?)
Expectations for the company are very high among analysts, and that could also set the stock up for a decline. Analysts are looking for fiscal first-quarter earnings to climb by 57 percent, to $0.44 a share, from the same period a year ago. Those estimates have risen by nearly 18 percent just over the past 30 days.
Meanwhile, analysts expect revenue to climb by 23 percent to $2.935 billion. The forecast of massive growth rates may lead to the stock declining should they fall short, or not beat projections by a wide-enough margin.
If Salesforces declines in the coming weeks, it may be because the stock got ahead of itself and because expectations for the company's future growth were getting too high.
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.