Salesforce (CRM) Heads Up a Light Reporting Week

Salesforce.com, Inc. (CRM) reports third quarter 2020 earnings after Tuesday's closing bell, with analysts expecting the Dow Jones Industrial Average's newest member to post earnings per share (EPS) of $0.75 on $5.25 billion in revenue. If met, EPS will mark a 0% profit change compared to the same quarter in 2019. The stock soared 26% after beating second quarter estimates in August and topped out just three days after the Dow inclusion on Aug. 31.

Price action has gone nowhere in the past three months, carving a shallow channel that is testing 50-day exponential moving average (EMA) support. Both weekly and monthly relative strength readings have crossed into sell cycles during this period, signaling an intermediate correction that has unfolded through time rather than price, at least to this point. Accumulation readings have slumped close to two-month lows ahead of the release, giving bears a slight edge.

Needham just expressed caution about reports indicating that Salesforce will buy business software platform Slack Technologies, Inc. (WORK), worried the acquisition will expand into areas that are less "sales synergistic." The analyst believes that a deal could delay "additional margin expansion into fiscal year 2023 at the earliest," potentially putting pressure on the stock price, which now translates into a lofty 95.6 price-to-earnings ratio (P/E).

Wall Street coverage remains highly bullish on Salesforce stock despite the deal debate, with a "Strong Buy" rating based upon 14 "Buy," 3 "Hold," and 0 "Sell" recommendations. Price targets currently range from a low of $234 to a Street-high $325, while the stock is set to open Monday's session about $44 below the median $293 target. There's plenty of potential upside in this placement, but more time may be needed to work off overbought technical conditions after the 50%-plus year-to-date return.

Salesforce Daily Chart (2018 – 2020)

The stock entered a channeled uptrend in 2010 and held within those boundaries into a 2018 breakout that topped out above $160 in October 2018. It sold off to an eight-month low at year end and turned higher into 2019, completing a round trip into the prior high in March. A secondary selling wave carved a shallow decline into October, when committed buyers took control, fueling a January 2020 breakout that reached $196 before failing during the pandemic decline. It fell more than 80 points into March, posting a 16-month low.

A V-shaped recovery wave reached the first quarter peak in June, yielding a breakout that accelerated after August earnings. The advance posted an all-time high at $284.50 on Sept. 2 and rolled over, carving a bull flag pattern that partially filled the post-earnings gap in early November. The stock remounted the broken 50-day EMA a few sessions later but has gone nowhere since that time, in line with adverse weekly and monthly stochastic readings.

The on-balance volume (OBV) accumulation-distribution indicator topped out with price in September and eased into a trading range in October. OBV is holding well above 2019 and early 2020 levels, confirming a breakout that should yield higher prices. Even so, the three-month corrective pattern looks incomplete, exposing price action to a gap fill that reaches the $220 level. That's also breakout support, offering a potential low-risk buying opportunity.

The Bottom Line

Salesforce stock entered an intermediate correction in September after posting an all-time high and booking a 2020 return in excess of 50%. 

Disclosure: The author held no positions in the aforementioned securities at the time of publication.