Name That Trade – $CRM: Stealing Product

by Dan August 14, 2015 12:08 pm • Commentary

Event: (CRM) is scheduled to report their fiscal Q2 results next Thursday after the close.  The options market is implying about a 9.5% weekly move. With the stock near $72, the Aug 72 straddle (the call premium + the put premium) is offered at about $6.85, it will expire the day after the results. If you bought that today and thus the implied move for earnings, you should expect to see implied volatility hold steady into Thursday possibly offsetting some time decay. But the weekly move seems a bit high when you consider the 4 qtr and long term avg one day move post results has been about 7%.

Prior to the company’s Q1 report on May 20th, when the stock was $70, the implied move was a bit lower at only 6.2%, which it subsequently under-performed, rising only 4% the next day.

So why the heightened fear into this Quarter?  Your guess is as good as mine. The stock has essentially traded sideways since early May when it broke out to new all time highs on take-over speculation, trading in a fairly tight range between $70 and $75:

[caption id="attachment_56140" align="aligncenter" width="600"]CRM 1yr chart from Bloomberg CRM 1yr chart from Bloomberg[/caption]

Very near term $70 is important, with little by way of support until you get to the stock’s 200 day moving average at $66, but more likely $65, down about 10%.

The $70 billion question is whether or not the company is still in play. Shortly after the rumors hit, and the stock surged I had the following thoughts on the challenges to a deal, from May 4th:

The most obvious challenge is size (slap a 25% premium to CRM’s current market cap and you get a $60 billion price tag).  Then there is valuation. CRM trades 100x expected fiscal 2016 earnings and 7.25x sales, which would result in massive eps dilution to an acquirer. And if you look at the list above, most have mid single digit earnings and sales growth at best. And of course culture as the company is founded by an ex-Oracle salesman who is short on love for ORCL founder and chairman Larry Ellison and has been a thorn in most of the above groups side’s given its disruptive nature to their existing business models.


ORCL could put together a $55 to $60 billion bid with cash and stock ($195 billion market cap, $44 billion in cash and $32.5 billion in debt) but it would be massively dillutive to their earnings that are expected to flat year over year on essentially flat sales growth.


MSFT has a relatively new CEO who used to run MSFT’s Cloud division. Could Satya Nadella look to reformulate the company, and step out from under Ballmer and Gate’s shadows?  As far as size, MSFT’s $395 billion market cap, and $95 billion in cash ($64 billion ex-debt) means the company could make such a deal. And given the stock’s 20% gains in the last month, they suddenly have a little room on the downside if investors were not enamored with such a deal.

I suspect that a company like Oracle may be forced to consider a purchase of their arch rival CRM if the company can not accelerate their cloud based revenues to became a larger part of their whole. It would also be sort of fitting to see a mega merger in one of the largest secular shift in enterprise computing in decades before this cycle tops out.

We will take a closer look next week prior to results, for now the move looks high, and the likelihood for a deal low.

For those who want to express a directional view, calendars targeting the implied move could be the way to play.