Has Salesforce’s Stock Peaked?

After a 45% rise since the March 23 of this year, at the current price of around $203 per share, we believe Salesforce.com’s stock (NYSE: CRM) has no upside left. Salesforce’s stock has increased from $140 to $203 off the recent bottom, compared to the S&P which increased by around 47%. 90% of Salesforce’s revenue is deferred hence the coronavirus is not expected to impact its top line much, leading to the stock recovery. The company also reported positive Q1 2021 (ended April 2020) results, with revenue up 30% y-o-y amid the months where the lockdown was in force across the world.

Salesforce’s stock has nearly reached the level it was at before the drop in February and March due to the coronavirus outbreak becoming a pandemic. Despite that, the revenues will likely be better than last year primarily due to a high percentage of deferred revenue, which we believe the market has already accounted for at current price.

The company gained 42% of its share price since the end of December 2017, and some of this rise over the last 2 years was helped by a 62% rise in Salesforce’s revenues from $10.5 billion in FY 2018 to $17.1 million in FY 2020 (FY ends in January). The net income margin fell from 3.4% in FY 2018 to less than 1% in FY 2020. The fall in margin in FY 2020 is primarily due to one-time foreign incremental tax costs.

The company has seen a steady revenue rise over recent years, and its P/S multiple has also been rising steadily. We believe the stock has no upside left after the recent rally due to the potential uncertainty of Covid outbreak. Our dashboard ‘What Factors Drove 98% Change In Salesforce Stock Between FY 2018 And Now?‘ has the underlying numbers.

Salesforce’s P/S multiple increased from 7x in December 2017 to 8x in December 2019. The company’s P/S has improved to 10x amid the coronavirus pandemic as the revenues are not expected to be affected.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. Notably, Salesforce’s stock is up by about 12% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a rise of about 2%. Despite the coronavirus pandemic the company saw a 30% growth in Total revenues for Q1 2021. Salesforce Platform and Other led the revenue growth recorded at 61% y-o-y with $273 million contributed from the acquisition of Tableau (The segment’s growth was still high at 31% if we remove the contribution due to Tableau’s acquisition).

In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors focusing their attention on FY 2022 results.

The company is expected to add close to $8 billion to its revenue in FY 2021 and FY 2022. As per Salesforce’s valuation by Trefis, CRM’s fair price estimate comes to $201.

For greater insight in to the software space, check out VMware and IBM‘s growth potential.

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