Salesforce equals SaaS times Deceleration

by Dan September 8, 2016 1:33 pm • Trade Ideas

There is little doubt that (CRM) has been a pioneer of one of the largest secular shifts in enterprise computing in decades, and is helmed by a guy who has the potential to be the next coming of Bill Gates. But despite most large cap tech stocks and the broad market very near all time highs, shares of CRM have under-performed most peers and the broad market, down 5% on the year, and down 12% since making new all time highs in late May.  The stock is trading today at its lowest levels in 4 months, despite still up 42% from its 52 week lows made in February:

CRM ytd from Bloomberg
CRM ytd from Bloomberg

Since reporting their fiscal Q2 results last week, sentiment towards the stock near term has shifted a tad towards glass half empty as the quarter  showed “billings” that were below expectations, and offered Q3 guidance that suggests further deceleration.  Here was CEO Benioff’s explanation for the disappointing billings, blaming in large part to currency headwinds:

On August 31st, prior to results I highlighted the following concerns for the stock.

Stocks like CRM (meaning expensive, trades 80x expected f2017 earnings, 6.3x sales, with universal bullishness, 44 Buy ratings, 2 Holds and only 1 Sell, with short interest at only 2% of the float) can be subject to sharp sentiment shifts when fundamentals decelerate, and that takes away m&a premium. That’s likely the cause for the stock’s recent pause

Despite the universal sell side bullishness on the stock, I think this is an underappreciated concern for the stock, and that’s the removal of M&A premium, which placed CRM in competition for LinkedIn, with Microsoft, a company as recent as May 2015, thought to be a potential buyer of CRM:

If I were a CRM shareholder, I would have two main concerns, first the potential for a massive sentiment shift if fundamentals were to downshift after a period of strong execution and investors disinterest in such mundane things as valuation. But maybe equally important, faced with the eventual revenue growth deceleration (was 33% in 2014 & 2015, 24% in 2016 and expected to be 24% in f2017) does the company make a large expensive acquisition?  The fact that Benioff was willing to buy LNKD for 50% of CRM’s market cap (in cash, stock and debt deal) for a company who sales growth in 2016 is expected to be 26% (similar to its own) at about 45% of their expected f2017 sales should get investor’s antennas up.  And I’ll add that CRM’s expected 96 cents in f2017 earnings are only 13 cents on a GAAP basis, while LNKD’s $3.70 in expected 2016 eps is really a loss of $1.23 a share on a GAAP basis!!!

Catalysts: earlier today the company’s COO spoke at Citibank’s Tech conf, with two more c-level exec appearances in the coming week:


I’d be shocked if there was anything incremental from these conferences, but given the spin Benioff gave to CNBC’s Jim Cramer last week, I suspect we will get more of the same.  And then on Oct 4th the company starts their Dreamforce Conference where Benioff will keynote, with other technology thought leaders and host a concert from U2.

These events could buoy the stock in the near term near support at $75, but positioning for another disappointing quarter of billings when the company reports next in mid November could be the trade.

So what’s the trade?

If you are inclined to believe that the headwinds experienced in CRM’s fiscal Q2 are not a 1 quarter phenomena, and their guidance proves to be a little optimistic, then you might consider a bearish trade that targets a gap fill back to $65:

CRM ($74.50) Buy Nov 75 / 65 / 55 put butterfly for 2.25
  • Buy to open 1 Nov 75 put for 3.75
  • Sell to open 2 Nov 65 puts at 85 cents each or 1.70 total
  • Buy to open 1 Nov 55 puts for 20 cents each

Break-Even on Nov expiration:

Profits:  up to 7.75 between 72.75 and 57.25 with max gain of 7.75 at 65

Losses: up to 2.25 between 72.75 and 75 & between 57.25 and 55 with max loss of 2.25 below 55 and above 75

Rationale: This trade is pressing the recent weakness so it tries to minimize as much premium risk as possible with a butterfly. November is a long time away so the fly won’t be effected too much my a little up or down in the stock for now. Where it will do really well is either on a big move lower towards the 65 strike in the near term, at which point it will be a nice profit but nowhere near its full potential. Or better yet, a slow creep down over the next few months where the trade’s profits can be realized even before earnings. If the trade is out of the money into earnings, the increased vol will help alleviate alot of the decay. The main risk to the trade is the stock going significantly higher in the near term.