MorningWord 3/1/13: $CRM – Where Does the Incremental Buyer Come From?

by Dan March 1, 2013 9:22 am • Commentary

MorningWord 3/1/13:  Last night CRM reported eps (.51 vs .40 consensus, but .08 of the beat comes from an r&d tax credit) and revenues ($835m vs $831m consensus) that beat expectations, and guided Fy 2014 to inline with consensus.  By all accounts the quarter looked good on most metrics from op margins that came in 1% higher than expectations, and strong bookings that included a very healthy large order closing rate in Q4.  Yesterday afternoon, prior to the results I placed a low risk, potentially high reward bearish trade in Apr expiration, that would benefit from a move in line or greater than the implied 8% move, but, it was not solely predicated on the move happening today.

Most readers know I often look to be a tad contrarian in these situations, and CRM is not the sort of stock that would make it on my Buy list given its current growth profile and valuation. So I would tend to look for structures that offer a good risk reward in front of potential inflection points, and that was the plan with yesterday’s trade (from yesterday’s trade post):

Trying to pick tops is difficult business, but trying to spot inflection points is another thing all together.  On tonight’s call, if results show fiscal 2014 consensus estimates to be a tad optimistic, the stock will likely be re-rated, similar to the revelation that AAPL investors had in the last 5 months that the company was facing deceleration in earnings and margins.  The difference btwn CRM is that the stock is priced as if they will continue to grow sales and earnings at 20% plus a year for the next ten years.

So what did last nights call actually show? As stated above, it showed what I would call their ability to hold on to their first mover advantage for now.  The guidance that they gave for the current quarter was actually a tad light to expectations, and the full year guidance bulls will argue will prove to be conservative.

Wall Street analysts are overwhelmingly positive on the stock with 35 Buys, 3 Holds and 4 Sells, things feel about as good as it gets from a sentiment standpoint.

The stock is up ~4.3% in the pre-market and I have a sneaking suspicion that the quarter and guidance wasn’t the sort of masterpiece that will drive incremental buyers a few % from all time highs, and if I were part of the 10% short interest I might not exactly being scrambling to cover.  Earlier in the week another high valuation, semi-controversial stock, PCLN had a large implied move that it under-performed on its own strong quarter, and has since spent the next 2 trading days filling in the earnings gap, maybe its wishful thinking, but if I saw this sort of price action in CRM today, the stock could set up as a decent press on the short side.

So here is the MAIN ERROR IN MY CRM TRADE,  (as I said I wasn’t trying to pick a top merely an inflection point, but in hindsight),  I SHOULD HAVE JUST WAITED TILL AFTER THE RESULTS WERE OUT AND PLACE MY TRADE WHETHER THE STOCK WAS UP OR DOWN 4%.

I was risking less than 1% of the underlying to catch the inflection over the next month and a half, but now I am stuck with a position where the strikes may be to far out of the money, I will need to dig myself out of a hole.