$CRM Fiscal Q3/13 Earnings Preview

by Dan November 20, 2012 11:26 am • Commentary

Event: CRM reports their Q3 earnings tonight after the close, the options market is implying about a 7.5% move following earnings which is basically inline with the 4 qtr avg move of about 7.25% and 8 qtr avg move of about 7.5%.  

Sentiment:  Wall Street analysts are overwhelmingly positive on the stock with 34 Buys, 2 Holds & 3 Sells with and avg 12 month price target of about $176, or about 20% higher than current levels.  Traders are a tad less bullish, with short interest nearing 12% of the float.

Fundamentals/Valuation:  CRM is one of the few large cap Technology companies showing earnings growth of 10% or better, with revenue growth of 20% or greater for the next 2 years.  Valuation by almost every metric is stretched at ~97x this year and 74x next year’s expected earnings and ~5.3x next years expected sales which is at the very upper end for a company this size.

Price Action/Technicals: CRM has massively outperformed the broad market and almost every other large cap tech stock in the world in 2012, up 44% ytd.  From a technical standpoint, both long term  and near term (3 yr & 1 yr charts below) the charts are very constructive, aside from the fact it is sitting at a fairly important uptrend and faces some fairly stiff long term resistance about 10% higher than current levels and no real support till about 18% lower.

3yr CRM chart:

[caption id="attachment_19665" align="aligncenter" width="490" caption="CRM 3 yr chart from Bloomberg"][/caption]


3yr CRM chart:

[caption id="attachment_19666" align="aligncenter" width="490" caption="1 Yr CRM Chart from Bloomberg"][/caption]

Volatility: CRM 30 day at the money implied vol is not as high as it has been in front of all 3 earnings announcements in 2012 (circled). Weekly vol is around 90 with the ATM straddle pricing in over a 10 dollar move in the stock. December vol is about 42, which again, is not that high historically:

[caption id="attachment_19656" align="aligncenter" width="490" caption="CRM 30 & 90 day Realized Vol vs 30 day Implied Vol from Bloomberg"][/caption]

Expect Dec and Jan vol to collapse to the low 30’s following the report. Jan is currently about 37 vol.

My View:  CRM has shown some very impressive relative strength on the year, although down about 9% since the market top in Sept, which is basically in line with the Nasdaq decline in that same period. Why it is impressive is because the many high valuation tech peers have performed much worse than the broad market in the last 2 months and my assumption would have been that a higher flier like CRM with a high beta would have been taken apart.

Investors in CRM are not deterred by the valuation, they believe in the secular move towards cloud computing and believe that CRM is uniquely positioned to benefit from this fairly nascent market.   As AMZN has showed us, shorting a company based solely on valuation can be a costly endeavor, but investors and shorts alike will keep a close eye on any indications of aggressive competitive pricing slowing sales and depressing margins in their core business.  MSFT and ORCL are becoming very squarely focused on CRM’s core “software as a service” platform and most tech investors know that when behemoths like MSFT wan to enter a new business they have tremendous flexibility to compete on price and hurt their better positioned smaller competitors.

Oh, one last thing. I am fairly certain I heard that CRM CEO Mark Benioff will be on JimCramer’s Mad Money program tonight after their results, I doubt he will be on after dropping a massive bomb on investors. Take that for what it’s worth though. (not much)

We are looking at a few different ways to play, I will be back if anything sticks out, calendars could make sense, selling weekly and buying longer dated.