Salesforce (CRM, Financial) continued to show monstrous growth after reporting non-GAAP earnings of 19 cents per share on $1.81 billion in revenues. Sales rose 28% year over year on a constant currency basis, an acceleration from previous quarters.
Adjusted earnings are also trending nicely in the right direction, and Salesforce has been profitable for more than two years. This is partly thanks to high demand for cloud-based customer management software services and a lack of real competition in the marketplace. As Salesforce President Keith Block crowed in the firm’s earnings presentation:
"There's no question that we are outpacing the competition in terms of enterprise application sales; there is no question. We continue to take share, and that's both market share and mind share."
The guru view
Salesforce’s continued ability to execute has been a common theme amongst analysts. Shortly before Salesforce’s results, Jeffries noted the company’s "exceptional sales leadership and execution” were driving the company’s revenue higher, as competition from Oracle (ORCL, Financial), SAP (SAP, Financial), Microsoft (MSFT, Financial) and NetSuite (N, Financial) failed to shake Salesforce’s continued growth.
Salesforce has been a strong performer for a long time and a favorite of investment banks and hedge funds. Six analysts upgraded the stock in the last year, and 42 analysts rate it a buy or strong buy. Large investors like BlackRock, T. Rowe Price (TROW, Financial), Sands Capital Management, State Street (STT, Financial) and Jennison Associates have over $1 billion worth of CRM stock, and fund manager/brokerage giant Fidelity had an eye-popping $7.77 billion worth of Salesforce stock by the end of last year.
That doesn’t mean the stock has always done well. Before releasing earnings, the stock was down 20% YTD and was roughly flat over the past year. The accelerated selling in early 2016 was largely driven by one fear: The economy is struggling, and companies are investing less in all sorts of things, including cloud-computing solutions.
The macro question
It’s no surprise, then, that the first question on Salesforce’s earnings call from analysts focused on the macroeconomic environment. Noting the strong sales guidance, Morgan Stanley (MS, Financial) analyst Keith Weiss asked how management could be so confident about sales “given the current sort of economic environment."
Salesforce didn’t flinch.
CFO Mark Hawkins said that “big deals coming in” were giving them confidence. "When you see the business performing across geos, across clouds, that gives you the confidence that our book of business and what we're hearing from the customer had basically caused us to raise our guidance, and that's what we're seeing."
Hawkins added that he was aware of the macro worries in the financial industry but said, “We're not seeing an economic impact.” In other words, companies are still investing in cloud solutions at a strong rate, and Salesforce is there to benefit. This makes the recent selloff in cloud names seem even more irrational and also makes Salesforce seem like a much better buy.
It’s no surprise that Salesforce spiked over 8% after hours and may climb even higher if the fears about lower corporate investment prove to be misplaced.
Disclaimer: The author has no position in any of the stocks mentioned in this article, and no intention to initiate a position in any of the names mentioned in the next week.
