Event: CRM reports its fiscal Q3 earnings tonight after the clsoe. The options market is implying about a 8.5% one day move, which is in line with the 4 qtr avg of about 8.5% and a touch above the 8 qtr avg of about 7.75%.
Sentiment: Wall Street analysts are positive on the stock, with 36 buys, 3 holds, and 5 sells, though the average 12 month price target is only around $57. Short interest is at 9% of float, and has been relatively unchanged over the past 2 years:
Options Open Interest: Open interest is just about evenly split between puts and calls. The past 1 month volume has been slightly skewed towards calls, at a ratio of about 1.2 to 1. With the stock at all-time highs, most of the open interest is at strikes much lower than the current stock price (the 42.5 strike has the most open interest in Jan14). Of nearby strikes, the Jan15 60 calls have over 5k of open interest, as does the May 50/65 strangle (May 50 put, May 65 call).
Price Action / Technicals: CRM had stalled for about 2 years, between late 2010 and late 2012, a poor relative performance, especially when compared to many of its internet software peers. The stock broke out above the $40 resistance level in late 2012:
That break higher initially looked like a false breakout when the stock came under selling pressure in June, but the stock has been on a steady uptrend of higher highs and higher lows ever since its low in late June:
Ever since the stock’s earnings gap on August 30th, CRM has followed a steeper uptrend shown in light green. The stock hit a new all-time high this morning, so there is no real resistance on the upside. The stock’s important support lies around the $50 level.
Volatility: 30 day implied volatility (red) in CRM has moved back to the high-40’s, which is right around where it was prior to the last 4 earnings reports:[caption id="attachment_32709" align="alignnone" width="600"] CRM 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro[/caption]
Implied vol is expected to fall back to around 30 after the earnings event, based on prior history. Given recent realized volatility in the high 20’s, it might not fall back quite that far this time around.
Our View: CRM is one of the favored technology companies where the earnings carrot seems to be perpetually in the distance, but investors are willing to hold out for that eventual reward nonetheless (AMZN is our favorite example of this). Even though CRM has hardly grown earnings since 2009 ($0.28 EPS in 2009, $0.36 expected in 2013), the stock has more than quintupled in that period. Granted, annual sales have gone from $1.3 billion to almost $4 billion, but even then, the stock is currently trading around 10x sales, a hefty valuation for a $34 billion company.
Whatever our concerns about valuation, though, the stock’s simple, strong performance keeps us wary on the short side. If valuation did not matter when the stock was around $40, it’s hard to make an argument that it will matter now. We are not optimistic on the stock’s long-term prospects (even if the company’s prospects continue to improve), but we have little interest in fading it here when it’s technically strong.