2nd Update Nov 18th at 9.52am: With the stock down about 10% at 113.80 I am selling half of this position for a 3.75 profit at 5.00
Update Nov 18th, 2011: After taking a hard look at CRM’s Q3 reported last night, it appears that there is one conclusion, that new business momentum slowed and thus the stock is seeing some weakness in the pre-market. After the print the stock traded as low as $112, down about 12% but quickly rebounded to about $119. The beat in the quarter that was just reported was aided by .03 from a favorable tax rate and lower share count, so the quality of the beat wasn’t fantastic. Most of the Street, which went into the print fairly enthusiastic are doing what they know how to do best, defend the position of the herd.
Here are a few excerpts from some analyst notes:
Citi Nov 18th note to clients:
Our bottom-line on billings — Our view is that weakness in Europe and shortening invoicing terms were likely culprits. The evidence of this is a meaningful deceleration in Europe revenue, which in a ratable model suggests significant impact on new business. On invoicing terms, CFO Smith kept referring to this dynamic and we calculate that a 3% unfavorable mix shift could have caused the weakness. This may have been paired with invoicing that was more front-end weighted in the July and April quarter. The company discloses off-balance sheet backlog once a year (Jan) and this metric will be important to proving visibility is still intact.
Goldman Nov 18th comment from note to clients:
The debate post last night’s results will be related to the apparent disconnect between bookings growth in the quarter and better–than-expected revenue guidance for FY2013. We believe a portion of this uptick is related to its acquired product portfolio coupled with its existing offerings. In fact, CRM stated off balance sheet backlog actually grew faster than what was put on the balance sheet in the quarter. We note bookings should post accelerating growth in F4Q12 even if we only assume mild upside to their sales and deferred targets.
Jeffries comment in note to clients Nov18th, 2011:
CRM disappointed by missing F3Q12 Street billings expectations for the first time in 10 quarters. Mgmt said that they exceeded their own new business expectations in the Q and implied F4Q12 billings would reaccelerate. Also, FY13 rev growth was above prior Street ests (adj. for assumed Model Metrics contribution). We maintain our Buy rating. Controversial quarter, Maintain Buy. CRM missed billings ests, reporting $567M +29% Y/Y v Street and us at $580M +32% Y/Y. This is the first time the co has missed Street billings ests in 10 quarters. CRM also raised FY13 rev ests to 28-29% growth, which is ahead of prior Street ests (adj. for assumed Model Metrics contribution). Clearly the stock just got more controversial, but if billings reaccelerate in F4Q12 we think the stock can work from these levels.
So how do I manage this? Here’s my take:
MY TAKE: the stock didn’t act well heading into the print, and given the valuation this little hiccup may cause some holders to re-evaluate the story as some vocal hedge fund investors like Whitney Tilson (read here). So while sell-side analysts defend their buy ratings, investors are hitting the pause button.
So let’s look at the trade from yesterday:
TRADE [Nov17th, 2011]: CRM ($128.50) Bought Nov19 120/110/100 Put Fly for 1.25
-Bought 1 Nov 120 Put for 3.48
-Sold 2 Nov 110 Puts for a total of 2.86 (1.43 each)
-Bought 1 Nov 100 Put for .63
Break-Even Nov Expiration Tomo:
Profits btwn 118.75 and 110, up to 8.75, max gain at 110 of 8.75 and profit trails off btwn 110 and 101.25
Lose up to 1.25 btwn 118.75 and 120 and 100 and 101.25 with max loss of 1.25 below 100 or above 120
TRADE MANAGEMENT: With the stock at 119 in the pre-market, I have to treat this structure like just being long the Nov 120 puts that expire today. This makes things a little tricky as I don’t want to be too quick on this until I get a good sense for where the stock settles in today. I guess my choices are to just trade the Nov 120 puts and leave the short Nov 110s on, now I can stomach the risk of staying short those until the close, but this may not be appropriate for all…..and frankly unless the stock nose-dives back to last night’s post market lows the chances of me trading out of the structure as a whole is not likely. I always knew there was a chance that I wouldn’t get out of this position if the stock was only down a bit, so at this point the decision is to take profits quickly on the Nov 120s I am long and risk the stock going back today to 110 and start losing there, or let the thing ride and see if it settles in below my break-even of 118.75. This will be a fun exercise and I am not likely to nail it, but stay tuned……
Original Post Nov 17th, 2011: CRM: Q3 Print Tonight, Everyone And Their Mother Wants to Be Long, Not Us
CRM report their Q3 earnings tonight after the close, the options market is implying about an 10.5% move following earnings vs the 4 qtr average move of about 8%.
-Short interest has been trending up of late, a little above 9% of the float.
-The Stock is about 20% off of the 52 week highs made in the spring and about 185 off of the Aug/Oct lows and practically unchanged on the yr.
-Wall Street analysts are overwhelmingly positive on the name with 29 Buys, 10 Holds and only 3 Sells. The Q3 analyst previews expect a beat and raise, here are some quick excerpts:
Citi Nov 14th:
We are upgrading CRM to Buy from Neutral and raising our price target to $158from $122 — Our change in opinion is based on increasing confidence in long-term profitability potential and also opportunity in “call option” markets.
Margins / cash flow almost must go higher — While we believe “investing for growth” will continue, after heavy investment in FY12, we believe it is nearly mathematically impossible for margins not to accrete meaningfully in FY13 and drive cash flow in excess of consensus, deadening concerns about lack of profits as metrics improve
How do we get there on valuation? — CRM is at the lowest premium vs. “highgrowth”
peers (CTXS, FTNT, QLIK, RHT, VMW) since 2009 on a revenue basis….with our belief that cash flow has to accelerate, cash flow-based valuation will become more palatable. Our increased PT reflects greater confidence in medium term growth and more credit for call options in early markets. While macro headwinds remain a concern, this is non-specific to CRM.
Credit Suisse Nov 15th:
We expect Salesforce.com to report results above consensus estimates driven by continued demand from enterprises refreshing legacy CRM applications, continued Service Cloud traction, and strong macro trends in the SFA segment as enterprises appear focused on customer-facing applications that can help boost revenue growth and improve productivity.
Goldman Sachs Nov 13th:
F3Q2012 results on November 17th, modeling revenue and non-GAAP EPS of $570 mn and $0.31, respectively, versus consensus of $571 mn and $0.31. This compares to management’s guidance of $568-$570 mn and $0.30-$0.31. Our checks for the quarter
point to the potential for upside on all key metrics this quarter and for consensus revenue and bookings to rise for FY13.We expect CRM to raise top-line guidance, and as such, coupled with expectations for slightly below trend deferred forecasts over the next few quarters, we see room for bookings forecasts to rise as we head into FY13. As such, despite our view that CRM will take down consensus operating margin expectations for next year to a range of flat to +100 bp (consensus +260 bp) we see the focus on bookings growth as driving outper-formance in the shares.
Morgan Stanley Nov 14th:
Expectations Look Reasonable: We expect CRM to report strong Q3 results, paced by accelerating large-deal activity, improving traction of newer offerings and increasing sales productivity. Our expectation for +30% YoY billings growth looks low given company momentum and normal seasonality, as we forecast new billings growth of only +20% in Q3 (v. >+50% in 1H12). We will also get a first look into FY13 and based on
historical out-year guidance, we would expect the co. to set an initial view around +25% YoY revenue growth, just above cons expects for +24%, though the Assistly
acq. will weigh on op. margins and likely limit expansion to 100-200bps for FY13. We think this top-line guide would be reasonable given the volatile macro and
should set the stock up well for CY12. We would note initial guidance for FY12 was for +20% rev. growth and the company will end up doing closer to +30% org. cc.
Longer-term, we continue to believe that 25-30% billings growth is sustainable and are buyers of the stock.
Deutsche Bank Nov 7th:
Despite tough comps, 3Q expected to be strong
We are expecting 3Q billings of 37% y/y, vs 35% a year ago and 37% in 2Q12. Our checks with partners (along with positive broader trends) indicate that this year’s timing of DreamForce allowed the company’s sales force to get in front of prospects and close deals. This tailwind should continue into 4Q. We are adjusting our estimates for dilution from Assistly and expectations of continued hiring. We believe these investments could result in more revenue generation in FY13 and are increasing our estimate above consensus. Reiterate Buy and $200 PT.
So how to trade this thing, here’s how I’m doing it:
MY VIEW: All that positive sentiment is fine and good, but I don’t buy stocks that trade at 100x next years earnings, cause with the stock at $130 and expected calendar year earnings of ~$1.30 that’s exactly what the PE is…..Now Bulls argue with expected sales growth of 35% this yr and 25% next year the company should be able to grow margins and earnings once they stop spending so aggressively. The company has a $17billion market cap and trades at about 9x trailing 12 month sales.
TRADE: CRM ($128.50) Bought Nov19 120/110/100 Put Fly for 1.25
-Bought 1 Nov 120 Put for 3.48
-Sold 2 Nov 110 Puts for a total of 2.86 (1.43 each)
-Bought 1 Nov 100 Put for .63
Break-Even Nov Expiration Tomo:
Profits btwn 118.75 and 110, up to 8.75, max gain at 110 of 8.75 and profit trails off btwn 110 and 101.25
Lose up to 1.25 btwn 118.75 and 120 and 100 and 101.25 with max loss of 1.25 below 100 or above 120
TRADE RATIONALE: again, not to sound like a broken record, but I don’t buy stupid stocks with stupid valuations like this. Expectations are obviously high heading into the quarter and most analysts expect a beat and raise. If the company falls short of these expectations, I would expect a re-test of the previous lows of about 120 with a very strong likelihood of a breakdown at those levels.
This is obviously a contrarian play, but as NFLX and GMCR have taught us anything this earnings cycle, if overvalued cult story stocks disappoint they will overshot on the downside. I am using a put fly as this is the cheapest way to isolate a move to between 120 and 110 and given the 1 day nature of the trade I am either goign to get it very right or very wrong.