MorningWord 10/14/16: Salesforce = SaaS x Deceleration… 2.0

by Dan October 14, 2016 9:29 am • FREE ACCESS (CRM) has lost 10% of its market value (about $5 billion) since offering disappointing billings for the current quarter in late August. The stock is down almost 17% from its all time highs made in May, and down 10% on the year.  While the company has posted mid twenties sales growth in each quarter of the year, GAAP profitability has been marginal, and billings growth has decelerated.  Since their Q2 report on Aug 31st, the stock has had a few gaps lower, and one higher resulting from reports about their interest/dis-interest in making a bid for Twitter (TWTR).

The stock is hovering above near term technical support at $70:

CRM ytd chart from Bloomberg
CRM ytd chart from Bloomberg

Given recent media reports, it appears that after a flurry of speculation as to who might bid for TWTR, CRM is the last man standing. This is all speculation obviously, who will, who won’t bid for them, but given the price action in CRM over the last month, it appears that CRM shareholders have placed considerable credence in the rumors.

I would add that despite the stock’s poor performance ytd and from its highs, Wall Street analysts remain overwhelmingly bullish on the name, with 44 Buy ratings, only 2 Holds and 1 Sell!  It appears that the buy and sell side are not on the same page.

Oh and what would a technician, one who does not care about fundamentals, valuation, m&a outlook say about this chart.  Obviously it is in a well defined downtrend from the all time highs, with a series of lower highs and lower lows from the highs, littered with gaps on large volume, showing poor relative performance to the broad market and most mega-cap tech peers. All less than constructive.

Oh and for those who give credence to instances where short term moving averages move above or below long term ones, this may be happening in CRM. It’s 50 day moving average (purple above) is about to cross below its 200 day moving average (yellow above) which is commonly referred to by some technicians as a Death Cross. I have no data to put forward whether or not such crosses actually result in the near term death of a security (google it kids, I am sure its out there), but a break of $70 on an apparently unwanted bid (by large CRM investors) for TWTR would very likely cause a gap fill from late February to the mid to low $60s.

If CRM does not make a bid for TWTR, and the company is not able to demonstrate a re-acceleration in billings when they report fiscal Q3 results in mid November, I suspect investors will shoot first and ask questions later given its valuation. More importantly investors may start to question the company’s aggressive m&a strategy, which included a stated desire back in June to compete with Microsoft (MSFT) for their $26 billion acquisition of LinkedIn (LNKD) and now TWTR.  All this despite what has been a flurry of acquisitions already in 2016, some not inconsequential for a company with a $48 billion market cap (Krux for $700 million two weeks ago, Quip for $750 in August, Demandware for $2.8 billion in June, to name just the big ones of the 10 in total).

If I were a sell side analyst I’d be one of those two near term HOLD ratings, looking for a better long entry on a gap fill.