Estimated read time: 3 minutes
Publication date: 10th Jun 2019 08:08 GMT+1
Tech stocks sank in Q2 on concerns over trade wars between the US and China, pulling some larger SaaS names down in tandem, despite marginal connections to the economic factors threatening their hardware-exposed fears. Many observers noted this as a potential entry point for correlated stocks with unimpacted fundamentals, like salesforce.com (NYSE: CRM).
The sector has rallied in recent weeks, and salesforce is approaching all-time highs, rewarding anyone who bought on the dip. Salesforce beat earnings estimates on June 4th and provided bullish guidance, drawing acclaim from analysts and pushing shares higher, but fundamental-driven value investors often view these pops as opportunities to realize some gains and rebalance towards less fancied stocks.
Salesforce.com grades well on financial health and efficiency metrics. The company’s capital structure carries less debt than most industry peers, and it has substantially lower leverage than most large cap stocks. Healthy EBITDA and net margins lead to strong ROA, ROE and ROC ratios relative to other tech names. The only comparatively poor metrics in these categories are asset turnover and receivable turnover, but the performance in these lines are not sufficient to suggest sub-optimal stewardship.
The company’s growth metrics have also been strong, with co-CEO Marc Benioff indicating that the company is on the path to doubling revenue over the next four years. Indeed, the Finscreener gives salesforce.com a four star plus growth rating, indicating excellent performance and outlook. The analyst community has responded favorably, as 27 of 28 analysts rate the stock a strong buy due to its growth potential.
However, investors have to pay a premium to benefit from the growth potential in CRM. The stock’s valuation ratios are exceptionally high across the board, even relative to other tech companies, which tend to maintain richer valuations than other sectors.
Ultimately, salesforce.com is a stable company with an attractive economic moat and a great organic growth outlook, which can be a rare set of characteristics among large caps. It receives a healthy three-star rating from Finscreener’s metric tracker. That said, CRM is almost certainly not the cheapest stock to provide exposure to growth. Active fundamental investors may be well-served to take some gains and redeploy capital elsewhere, but there’s no reason to think that salesforce.com is going to lag its peers if markets continue to trend upward.
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