Salesforce share price: what can investors expect ahead of earnings?

With more people working from home than ever before, many businesses are undergoing digital transformations — good news for the likes of Salesforce’s [CRM] share price, as demand for SaaS sores.

American software company Salesforce is one of the largest customer relationship management (CRM) platforms in the world, with its primary focus being to help businesses manage sales operations and track customer interactions. As lockdown measures remain in place around the world, businesses have little choice but to embrace home working culture and the digital products that facilitate it. Salesforce’s share price has reacted to this, climbing, 6.5% YTD through 22 May. After slumping as low as $124.30 in mid-March, the share price has muscled its way back up to $177.85 — a 43% rise.

The company, which already serves more than 150,000 companies, has seen demand and its subscriber base in line with increased growth of SaaS (software as a service) solutions demand. With its next earnings release scheduled for 28 May, what direction should investors expect Salesforce’s share price to go?

Earnings beat

Salesforce reported its Q4 earnings in February, with earnings of $0.66 per share. Although this was a 5.71% drop from the previous year’s $0.70 earnings per share, it beat the Zacks consensus estimate of $0.55 per share – an earnings surprise of 20%.

For its final quarter, Salesforce reported revenue had increased by 35% year-on-year to $4.85bn, beating the Zacks consensus estimate by 2.07%. For the entire fiscal year 2020, the company reported a revenue increase of 29% year-on-year to $17.1bn.

In a statement released by Salesforce following its earnings report, Marc Benioff, CEO described the company’s Q4 and year-end results as “phenomenal” going on to say that he “delighted to raise our revenue guidance for FY21 by $200m to $21.1bn at the high end of the range,” as well as expanding Salesforce’s operating margin.

Digital solutions to real problems

As governments urge citizens to stay home, many companies are turning to digital solutions to support their transition to “the new normal”.

In May, Zacks reported that one of its analysts “believes that Salesforce has been benefiting from a robust demand environment as customers are undergoing a major digital transformation.”

When the World Health Organisation (WHO) declared COVID-19 a pandemic on 11 March, Salesforce’s share price was trading at $154.57 — since then it’s risen by 15% to 22 May’s closing price of $177.85.

But coronavirus isn’t the only factor contributing to Salesforce’s rising fortunes. In recent years, the company has made a number of significant acquisitions which have helped it become a leader in other fields, such as analytics and data integration. 

Having already acquired Exact Target in 2013, e-commerce platform Demandware in 2016 and Mulesoft in 2018 Salesforce went on to purchase data analytics firm Tableau Software for $15.7bn in 2019.

This spending spree has “raised questions over Salesforce's organic growth”, according to Investor’s Business Daily, analysts say Salesforce’s ”AI's tools, plus Tableau, plus MuleSoft will make a powerful combination for digital transformation projects.”

Jefferies analyst J. Derrick Wood has a positive outlook on Salesforce stock, despite the potential recession looming. "CRM [Salesforce] is one of the few pure-play SaaS vendors to have gone through a recession,” he said in a report to clients. “While organic revenue growth could get cut in over half in a recession, our free cash flow estimate could actually increase by several hundred million vs. our $5.6bn estimate today. This is because, like we saw in the last cycle, margin expansion accelerates with a slowdown in growth investments.”

He added that “Importantly, this provides some fairly compelling earnings and valuation protection.”

“While organic revenue growth could get cut in over half in a recession, our free cash flow estimate could actually increase by several hundred million vs. our $5.6bn estimate today. This is because, like we saw in the last cycle, margin expansion accelerates with a slowdown in growth investments” - Jefferies analyst J. Derrick Wood

Is Salesforce’s share price a buy?

According to Zacks, Salesforce is expected to report earnings per share of $0.69, down 25.81% from the prior-year quarter. The consensus estimate predicts revenue of $4.85bn, up 29.87% from the prior-year quarter.

As for the full year, Zacks Consensus Estimates calls for earnings of $3.10 per share (+3.68% YoY) on revenue of $20.81bn (+21.7% YoY).

Whilst Zacks has upgraded its Salesforce rank from sell to hold in the last 30 days, the current consensus among 43 analysts polled by CNN Money is to buy. This comes from a large majority of 34 analysts, compared to three that gave an outperform rating, five that gave a hold and just one that gave a sell.

Among 39 analysts offering 12-month share price forecasts, also polled by CNN Money, the median price target for Salesforce sits at $196, although some estimates suggest the share price could rise as high as $230. These estimates would represent increases of 10.2% and 29.3% respectively for the closing price on 22 May.

Salesforce share price vitals, Yahoo Finance, 26 May 2020