Salesforce.com (NYSE: CRM) has been a brutal trade over the past year or two. The stock price came under pressure following the pandemic bubble, and fears of slowing growth amplified the effect. Each time the company produced better-than-expected results, bears sold into the rally, creating a string of buy-the-dip opportunities in 2022 and 2023 that have now paid off.
The Q3 results are mixed to include a better-than-expected margin and increase to profit guidance that sent the stock price up 10% to a multiyear high, confirming a complete reversal.
Stock market reversals are a tricky pattern to trade. The reversal can all too often turn from up or down to sideways and leave the market trading in a range rather than entering a new trend. In this case, the bottoming pattern has been completed; the pattern has been broken and opens the door to a $100 increase in share prices.
That target is derived from the magnitude of the pattern, a Head & Shoulders worth $100, and that figure is projected to the break-out point. That puts the market at $330, an all-time high above the analysts' highest price target.
Salesforce.com has a mixed quarter; investors cheer
Salesforce.com had a mixed quarter relative to the analysts' expectations, but the news is all good. The company reported $8.72 billion in net revenue for a gain of 11.2% over last year. The revenue is only as expected but is compounded by wider margins. Revenue growth was driven by a 13% increase in subscriptions and services, offset by a 4% decline in the Pro category. Business strength is supported by the company’s lean into AI. Salesforce.com is now the 4th largest SaaS company by revenue and the #1 AI-powered business service/CRM.
The margin news is what impressed the market. The company reported a 31.2% adjusted operating margin of 31.2% or up 850 basis points compared to last year. The margin gains are due to sales leverage, internal AI-powered efficiency and pricing increases enacted during the quarter. The result is an adjusted EPS of $2.11, which beat by 250 basis points and grew 50% YOY.
Guidance is also impressive, with revenue and earnings forecasts increased to a level above the consensus estimates. The news already has the analysts raising their estimates for the quarter and year, and the guidance may be cautious. The company’s RPO is also on the rise and leading business growth. Current RPO is up 14% compared to last year’s 11% increase, and total RPO is up 21%.
Capital returns remain solid for CRM investors
Salesforce.com isn’t a dividend payer yet, but it does repurchase shares. The company repurchased $1.9 billion of shares in Q3 F2024, up nearly 12% compared to last year’s Q3. The company’s cash flow and FCF were insufficient to cover the purchases but not in a way that harmed the company’s financials. The net results of YTD operations are a reduction in assets offset by a reduction in debt and a 1.9% reduction in share count. The balance sheet remains solid with a cash balance of $6.4 billion, $2.5 billion in net debt and leverage below 2X shareholder equity.
Analysts have yet to issue updates or revisions, but they are on the way. Until then, the analysts rated this stock at Moderate Buy and have been leading it higher all year; this year’s price target revisions have the consensus target up 12% compared to last year, and it is likely to trend higher now. The latest targets have the market trading in the high-end range, near $260 to $280, which is a 12% gain on top of the post-release pop-in price action for this tech stock.
The technical outlook: Salesforce.com completes the reversal
The price action in CRM shares formed a Head & Shoulders bottom over the past 24 months and confirmed the pattern as a full reversal. The post-release pop in action has the market up 10% and breaking to new highs. The new highs are above the pattern's neckline and supported by MACD and stochastic indicators. These indicators show a strong buy signal with momentum swinging to the upside and stochastic firing a bullish crossover high in the range. The stock may pull back before it continues higher, but the pullback will likely result in another buy-the-dip opportunity.
