Name That Trade – $CRM: Cloud Seeding

by Dan March 4, 2015 3:10 pm • Commentary

For the last few weeks CRM had been on our radar as a technical breakout candidate (here) as the market rally appeared to be broadening out with the Russell 2000 making new highs. Last week I took a look at the trade set up in CRM prior to their Q4 results (below) and aside from valuation there was little to suggest that the stock would not make new highs on a beat and raise.

Last Wednesday the stock rallied nearly 12% to close at new all time highs after better than expected results and guidance, but the stock has spent the last 4 trading sessions filling in a good portion of the gap:

CRM 10 day chart from Bloomberg
CRM 10 day chart from Bloomberg

I am an amateur chartist but I would say that while the price action since the gap is mildly concerning, a move back to the breakout level (around $65, right here!) could be a great long entry for those who think the last few days is nothing but profit taking in an expensive stock.

CRM 1yr chart from Bloomberg
CRM 1yr chart from Bloomberg

On the flip side, if the stock were to continue to decline and fill in the entire earnings gap then this failure could mark a near term top as failed breakouts on volume are quite possibly one of the worst technical set ups you can find.

While options prices in the stock have come down since earnings as expected, they remain elevated do to the quick failure.  For instance the April 65 calls with the stock at $65.35 are about $2.90, or about 4.5% of the underlying stock price, that seems a tad expensive for a slightly in the money play for a little more than five weeks.

If I were inclined to play for a re-test of last weeks highs around $70 I would probably look to a call butterfly, looking to take advantage of the elevated vol, at least on the out of the money portion of the spread.  I want to give the entry one more day to see if we get a fifth day of follow through. I’d love to see the stock nearer to $64 before putting this on but gun to my head today this is the trade that I would choose:

CRM ($65.35) Buy to Open April 65/70/75 Call Butterfly for 1.20

-Buy 1 April 65 call for 2.90

-Sell 2 April 70 calls at 1.00

-Buy 1 April 75 call for .30

Break-Even on April Expiration:

Profits: up to 3.80 between 66.20 and 73.80 with max gain of 3.80 at 70

Losses: up to 1.20 between 65 and 66.20 & between 73.80 and 75, with max loss of 1.20 (or about 2% of the underlying stock price) below 65 or above 75

Rationale: Decent payout potential if the recent stock selling is simply profit taking and the stock recovers back towards the $70 level. Volatility should also settle if that happens and this would be profitable both on deltas and vega if that’s the case. If the entry is indeed wrong it’s a defined risk bet that alleviated  much of its premium risk with the x2 sale of the 70 calls.




Original Post Feb 23rd, 2015:  Name That Trade – $CRM: Benioff To Never Never Land

EVENT:  CRM reports fiscal Q earnings on Wednesday after the close, the options market is implying about a 6% one day move which is basically in line with the 4 qtr avg, but below the long term avg of about 7%.

Earlier today there was some put activity that caught my eye, when the stock was $62.90., 7500 of the March 57.50 puts were bought to open for 77 cents.  These puts break-even at $56.73, down about 10%.  There was also a closing seller of 2000 March 60 puts at 1.36 when the stock was 62.76.

A couple of weeks ago as the Russell 2000 looked poised to breakout. I took a look (read here) at other stocks like the Russell 2000 that have under-performed their large cap brethren that could also benefit from a broadening out of the rally.  One such stock was (CRM), which has basically traded between $55 and $65 for the better part of the last 9 months:

CRM 1yr chart from Bloomberg
CRM 1yr chart from Bloomberg

The stock is now up nearly 6% on the year, and approaching the upper end of the one year range.  Despite the recent consolidation, the stock is just less than 10% from the all time highs made a year ago this week at $67:

CRM 5 yr chart from Bloomberg
CRM 5 yr chart from Bloomberg

CRM has been a fairly unique story given its early mover advantage in migrating everyday corporate software functions to a service in the cloud, that was massively disruptive to the dominant players like Microsoft in consumer and Oracle in the enterprise.  The company has been growing sales at about 30%year for almost a decade, and in this fiscal year are expected to post $6.5 billion in sales. The stock ain’t cheap, trading 90x expected earnings and 6x sales, which is basically unheard of (excluding Amazon and maybe just a few others) for a $40 billion market cap company.  The stock’s consolidation over the last year while the S&P500 has made a series of higher highs, demonstrates investor concern on valuation.

Aside from valuation its hard to knock the company, its products, its position, its continued ability to be disruptive and its brash CEO.  But it seems that investors are bracing for a material slowdown in sales growth as it seems like every enterprise computing vendor is moving some parts of their businesses to the cloud that will compete on price with some of CRM’s offerings.  I would also add that last spring MSFT and CRM announced a partnership to integrate some of their offerings, but this could be a sort of Trojan horse for MSFT to gain greater insight into the upstart’s core competencies.  Or it could be a dry run for MSFT to get a look under the hood before they use some of their $90 billion in cash to make a trans-formative acquisition.  I obviously have no clue what MSFT’s intent is, and I am merely speaking out-loud, but it does seem that its very near time for CRM to put up or shut up.

I will add one more observation. It was widely reported in the press (here) and on CEO Mark Benioff’s Twitter feed (here) that Metallica played at CRM’s employee “Kick Off” party, which sounds like a belated holiday party. I am hard-pressed to see the company have such a high profile event and then lay an egg on current quarter guidance… just saying.