Salesforce (CRM 137.68, +10.14, +7.95%) is trading higher
after the cloud software bellwether beat expectations on the top and bottom
line for the eleventh consecutive quarter.
The leader in customer relationship management reported third quarter EPS and revenue above its forecast while unearned revenue grew 25% versus its 20% guidance.
Fourth quarter EPS guidance was a little soft, but the revenue forecast for the fourth quarter was above consensus and the company raised its sales and earnings outlook for fiscal 2019. Salesforce investors are much more focused on top-line growth (and cash flow) rather than EPS.
What's more, the company's revenue outlook for next year (fiscal 2020) was above consensus. Remaining performance obligation, representing future revenues that are under contract but have not yet been recognized (backlog), ended the third quarter at ~$21.2 bln, an increase of 34% yr/yr. Remaining performance obligation for the next twelve months grew 27% to $10 bln.
The company hasn't missed on the top line since January of 2006 as its subscription business model results in highly visible revenue streams. Therefore, strong results do not come as much of a surprise.
Perhaps more important for the market is how Salesforce stock reacts to the strong results, given the rather poor sentiment we currently have around software stocks. We have seen a serious valuation correction among software stocks since the market peaked in early October.
Valuations among the group took off after Salesforce acquired recent IPO MuleSoft for $6.5 bln in cash at a mid-teens sales multiple. That effectively justified the frothy valuations seen in the software space. Dozens of software stocks traded with double digit sales multiples this Summer before the valuation correction took hold last month.
Continued weakness in CRM stock near term may indicate that growth stocks remain out of favor in the current market environment. For now, the stock has held its 200-day moving average at $135.22/share, which it gapped above this morning. With a ~$103 bln valuation, Salesforce trades at ~6.5x sales, or ~28x free cash flow estimates for next year.
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