Salesforce.com, Inc. (CRM) reports second quarter 2020 earnings after Tuesday's closing bell, with analysts looking for a profit of $0.67 per share on $4.90 billion in revenue. The stock sold off 8% after beating top- and bottom-line estimates by small margins in May but recovered in June and broke out to an all-time high in July. It has added about 13 points since that time but is still trading relatively close to the breakout level.
The San Francisco-based cloud software company is worth more than Dow component Cisco Systems, Inc. (CSCO) but still hasn't joined the Nasdaq 100, in a curious oversight. It also comprises around 8% of the iShares S&P GSTI Software Index Fund ETF (IGV), highlighting a heavy footprint in the software and big tech sectors. The lack of recognition hasn't hurt performance, but who knows how high the stock might be right now as a member of the red-hot tech index.
Wall Street consensus rates Salesforce stock as a "Strong Buy" based upon 20 "Buy," 2 "Hold," and 2 "Sell" recommendations. One of those sell calls was posted just last week by Loop Capital, indicating a hint of anxiety about second quarter results. Price targets currently range from a low of $120 to a Street-high $254, while Salesforce stock opened Monday's session about $3 above the median $206 target. This placement raises the odds for a sell-the-news reaction if results don't fire on all cylinders.
A downgrade is a negative change in the rating of a security. This situation occurs when analysts feel that the future prospects for the security have weakened from the original recommendation, usually due to a material and fundamental change in the company's operations, future outlook, or industry.
Salesforce Long-Term Chart (2004 – 2020)
The company came public at a split-adjusted $3.75 in June 2004 and sold off to an all-time low at $2.25 in August. The subsequent uptick posted a new high in October, ahead of steady upside that stalled in the upper teens in 2008. It fell to a three-year low during the economic collapse and turned higher once again, completing a round trip into the prior high in December 2009. A 2010 rally eased into a rising channel and held within those narrow boundaries into a 2018 channel breakout.
The uptick topped out near $160 in October 2018, signaling the first intermediate correction since 2015. It broke out once again at the start of 2020, reaching within six points of $200 in February. The stock rolled over and dropped within two points of the December 2018 low in March and turned higher into the second quarter, reaching the first quarter peak in June. A July breakout has eased into another rising channel, with support now aligned at the breakout level.
Salesforce Short-Term Outlook
There are several reasons to be cautious heading into this week's confessional. First, the monthly stochastic oscillator has lifted into the most extreme overbought reading since 2007, raising the odds for a reversal lasting six to nine months at a minimum. Second, the stock is set to print a monthly price bar 100% outside the top 20-month Bollinger Band®, marking a classic long-term sell signal. Third, the rally has reached resistance at a rising highs trendline going back to March 2019, also predicting a reversal.
Of course, there are no guarantees that the stock will turn lower after the earnings report this week, especially in a thinly traded summer market that is attracting significant momentum buying interest. Even so, the adverse reward-to-risk profile tells informed market players to look for opportunities with greater upside potential rather than chasing the herd by buying high in hopes of selling even higher.
Overbought is a term used when a security is believed to be trading at a level currently above its intrinsic or fair value. Overbought generally describes recent or short-term movement in the price of the security and reflects an expectation that the market will correct the price in the near future.
The Bottom Line
Salesforce stock has posted significant gains ahead of this week's earnings report, raising the odds for a sell-the-news reaction.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.