- Quarterly results beat all estimates and were the best the company has ever seen since the company was established sixteen years ago.
- Revenue continues to grow further and the Salesforce has scores of deferred revenue which will pour into their coffers in the near future.
- A merger or acquisition deal is on the cards.
- Analysts are strongly recommending “buy” positions on CRM stocks.
Amid Chinese-led economic uncertainty, one company that has fared relatively well over the past week was salesforce.com (NYSE: CRM). Salesforce is a provider of business cloud computing solutions that include programs and platform services as well as professional services. The Business focuses on customer relationship management.
The cloud software pioneer posted fiscal Q2 results on Thursday which beat analyst estimates and shares rose in after hour trading as a result. Throughout Thursday’s regular session Salesforce stock plunged 5.9% in line with broader market selloffs, however, following the release of what a clearly elated CEO, Marc Benioff, called, “The best quarter we ever had”, shares rose 4% in after-hours trading. Those quarterly results, and other promising prospects paint a promising picture for Salesforce’s forthcoming quarters.
Revenue Continues to Grow
Revenue for Salesforces rose 24% to $1.63 billion surpassing the less than $1.6 billion of revenue forecasted by analysts. The increase in revenue has helped the San Francisco based company accumulate record trailing twelve month revenues of $5.97bn. Salesforce successfully manages to increase its revenue base year-on-year by significant percentages and these growth rates do not seem to be slowing down anytime soon.
CEO, Marc Benioff, proudly proclaimed that the recent quarter was not only the finest they have ever achieved but also predicted that Salesforce would become the fourth-largest software company in terms of revenue by this time next year. Currently ranked sixth, Salesforce aspires to leapfrog rivals SAP (NYSE: SAP) to become the third largest software company behind tech titans Microsoft (MSFT) and Oracle (ORCL).
Salesforce’s guided fiscal revenue for the third-quarter is approximately $1.7 billion, up by 22.5%, thereby surpassing analyst projections of $1.675 billion. Judging from their record of exceeding analysts’ expectations, one would expect the former forecast to be more accurate. Despite Salesforce not achieving profitable quarters as of yet, if revenues continue to grow at current rates then Salesforce would undoubtedly achieve profitable quarters in the near future.
Another factor painting bullish forecasts for upcoming quarters is the amount of backlog of booked business both on and off the balance sheet. Deferred revenue, as of July 31 ’15 was $3.03 billion, demonstrating an increase of 29% year-over-year, and 33% in constant currency. Additionally, unbilled deferred revenue, representing contracted business that is unbilled and not stated on the balance sheet, concluded the quarter sitting at approximately $6.2 billion – up 24% year-over-year.
The amount of contracted business backlog is 26% higher year-over-year and thus stands at $9.2 billion – an immense amount of deferred revenue considering Salesforce’s size. Deferred revenue is seen as a key barometer of a company’s health and the large quantity of deferred revenues that will be flowing into the company’s coffers in the months ahead will sit well with both the directors and investors alike.
Merger and Acquisition Potential
Throughout May and April there were a flurry of rumours predicting an imminent takeover of Salesforce by a rival software company. Since Salesforce has been growing year-on-year by significant percentages, purchasing the company would make complete sense and any software company that acquires Salesforce would become a marker leader in the cloud CRM space.
In a Bloomberg report back in April, Salesforce confirmed that they are working with financial advisors to help field takeover offers after being approached by potential buyers. Evidently, Salesforce are considering appropriate acquisition offers. But with a market cap of $43 billion, the list of potential acquirers which would be suitable for acquiring the software company is limited.
An acquisition by Microsoft (MSFT) would significantly boost Microsoft’s cloud business and Microsoft unquestionably afford the purchase. The fact that Microsoft and Salesforce have recently been collaborating with each other quite a bit, certainly makes a merger or acquisition between the two software companies more plausible.
However, for me, the prospect of Oracle (ORCL) purchasing Salesforce is a much more likely and more appropriate scenario. Oracle has just recently raised $10 billion in new debt and has tens of billions in cash or cash or equivalents so the company can most certainly afford to purchase Salesforce. Salesforce’s CEO, Marc Benioff, started his career with Oracle and still has a great rapport with CEO Larry Ellison and Salesforce is a huge customer of Oracle’s database. Likewise, Oracle has been attempting to build up its cloud business over the past year and the acquisition of Salesforce would fit perfectly with Oracle’s current cloud-expansion philosophy.
Upon discussing a potential merger between the two companies, Daniel Ives of FBR Capita states that there will be, “minimal integration issues and a lot of potential synergies down the road. We would view this as a golden combination that makes a ton of strategic sense”. Since Salesforce have hired out financial advisers to assist the company in any potential merger or acquisition, they are clearly interested in listening for suitable offers and a merger with Oracle would fit like a glove.
Research firms and analysts are unmistakeably seeing lots of bullish considerations following Oracle’s most recent earning report and are perhaps viewing Salesforce as a potential merger or acquisition target too. Within the past few weeks major investing firms, including Brean Capital and UBS, have upgraded or maintained buy positions for CRM.
Analyst’s ratings on the stock is exceedingly high with analysts overwhelmingly recommending a “strong buy”.
Evidently, analysts are pretty excited regarding Salesforce’s future and believe that CRM shares will appreciate soon.
I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.
The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.
I Know First has had success predicting Salesforce’s stock behavior in the past, as seen in the forecast below. In this Tech Stocks forecast, Salesforce had a signal strength of 17.70 and a predictability indicator of 0.36 for the one-year time horizon. In accordance with the algorithm’s prediction, the stock price increased 35.33% during the following year.
Having demonstrated the success of the algorithm in the past, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. A three month and one year forecast from earlier this month is included below.
The algorithm’s forecast is moderately bullish and judging from this particular forecast believes that CRM stocks will rise- particularly in the long-term. The algorithmic analysis is slightly more moderate then the highly bullish fundamental analysis and is perhaps reflecting the analysis illustrated by some of the more cautious research firms out there.
However, CRM stocks has one of the strongest buy recommendations on the market at the moment. Their quarterly results beat all estimates and were the most lucrative the company has seen since the firm was founded sixteen years ago. Additionally, the company looks ripe for either a merger or acquisition.
Salesforce’s shares are therefore highly promising and this tremendous upside potential is further reflected in the highly bullish forecast predicted by the vast majority of analysts.
Positive signal strength does not mean investors should automatically buy the stock. Dr. Roitman, who created the algorithm, created rules for entry for a stock such as salesforce.com. Using this trading strategy, an investor should buy a stock if the last 5 signal strength’s average is positive and if the last closing price is above the 5-day moving average price. When both of these conditions are met, it is a good time to initiate a position in the stock.
Perhaps the reason why analysts are overwhelming in favour of buying salesforce.com shares is because it is not only a promising investment with so much upside potential but a safe bet too. If some sort of a merger or acquisition deal does indeed occur then Salesforce’s share value will increase exponentially and investors will make a handsome profit. However, even if the acquisition rumours and the indications given off by the company prove to be unfounded, as a result of revenues expanding further with each passing quarter, salesforce.com will inevitably become profitable and share prices will rise in the not so distant future.
Leaving the fundamentals aside, I Know First’s algorithmic forecast, which uses genetic algorithms and artificial neural networks to study financial markets in order to breakdown the flow of money between stocks, is also bullish too. Whatever the reasons behind the optimistic endorsements, CRM is undoubtedly one of the most highly recommended stock on the New York Stock Exchange and with almost every prestigious firm maintaining “strong buy” recommendations there is little justification to invest bearishly in CRM stocks.