MorningWord 9/1/16: Head in the Clouds

by Dan September 1, 2016 10:53 am • FREE ACCESS

Last night (CRM) reported fiscal Q2 results that were generally inline. They guided the current quarter down a touch, and left full year guidance intact.  The stock was down 8% last night in the after hours session and down 6% as I write due to weaker than expected billings (15% yoy, below consensus of 18% growth) in the quarter reported, and deferred revenue, (up 26% yoy reported below consensus of 28% yoy). And adverse effects of the strong dollar caused weaker than expected cash flow from operations ($251 mil, down 18% yoy vs consensus of $254 mil), an obvious concern for a company with such a large gap between adjusted and GAAP earnings (95 cents vs 29 cents respectively for fiscal 2017).

CRM is a great example of a stock where there is a growing disconnect between sell side and investor sentiment. Of the sell side analysts who cover the stock, 44 rate it a BUY, 2 rate it a HOLD and only 1 SELL, with an average 12 month price target close to $95 (I suspect this comes down a tad today). Despite this positive sentiment, the stock has not kept pace with the Nasdaq Composite’s 7.5% year to date gains (very near all time highs), CRM now down 12% from its all time highs made in late May.  The stock is now breaching important technical support at $75, below its 200 day moving average for the first time since late March, a momentum measure that it has bounced off of  two times since:

CRM ytd chart from Bloomberg
CRM ytd chart from Bloomberg

Last night on CNBC’s Fast Money we opened the program with the fairly simple question, is the “Cloud” trade coming undone?  My view, as described in the clip below is very simple, CRM went from a year ago being an acquisition target by the likes of Microsoft, to now being in competition for the sorts of massive acquisitions MSFT is willing to make (see recent $26 billion deal for LinkedIn):

Given CRM’s valuation, and the potential for further decelerating growth given increased competition, this changes the investment dynamic for the stock just a tad, possibly reinforcing the disconnect mentioned above between the Sell Side (those hoping to get CRM’s banking business or merely access to the company) and investors (those looking for future gains in the stock).

Near term this one has $70 written all over it. There’s no need to bottom fish until there (in this trader’s mind), and even there you’ll want to keep a tight stop as there is an air-pocket back to the February earnings gap in the mid $60s.  SO the “Cloud” trade might have hit some turbulence, and without M&A I suspect we could see a further tempering of valuations in the space in the near term. But very importantly, CRM CEO Benioff will face increasing competition from the likes of MSFT and Oracle (ORCL) head on, and I would much expect some bold moves in the offing that will likely include large M&A.