Trading Earnings: Salesforce.com Flying too High?
Salesforce.com (CRM) is set to report earnings after the market closes on Thursday, November 20. salesforce.com, inc. provides on-demand customer relationship management (CRM) services to businesses and industries worldwide..
CRM is expected to earn a profit of 7 cents for its 3rd quarter. We expect the online client relationship manager to announce earnings and guidance that will miss investors’ and analysts’ expectations.
The way we see it, beat or miss earnings, Salesforce.com stock is going to swing wildly after the quarterly check-up numbers are announced. There is a lot of uncertainty regarding CRM’s immediate future. Zacks recently reiterated its buy ranking saying Slaeforce “has substantial subscriber and customer growth.” Zacks did note they expect earnings per share to fall for the rest of the year
Contrasting the buy view, this Tuesday, Cowen’s Peter Goldmacher wrote that investors should avoid CRM’s shares. He says to expect CRMs 3rd quarter to be “soft,” but that “it’s hard to say what’s really priced in.” In other words, he thinks the stock has the potential to get hit hard.
Looking at the CRM’s valuations, it’s hard to see how they have a little air come out of the balloon. Shares current trade hand at a P/E of 101 and at 48 times next year’s earnings; that’s unheard of in this market. Analysts’ growth expectations are nowhere near the heights that can support these loft P/E. Salesforce.com is currently trading at 3.6 times sales, while this isn’t off the charts, it still is priced to near perfect execution. With a PEG ratio of 2.23 and Return on Equity of only 7.29, we don’t see how perfection happens.
We believe the risks are to the downside; however, Slaesforece.com shares can move aggressively in either direction following earnings. Traders looking to reduce their risk should consider an options straddle. More aggressive investors can short the stock or buy puts.
Suggested Stop Long: $23.11
Suggested Stop Short: $31.65
Tags: analysts' expectations, beating earnings, cal options, call, earnings, earnings announcements, missing earnings, option, put, put options, Stock Picks, trade on earnings, Trading Earnings, Trading Ideas, upside surprise, wall streets expectations
