Our Analysis of Salesforce, Inc. (CRM)

Every Tuesday at HX Daily, we analyze one of the US stock market's biggest and most widely owned companies.

We analyze these companies using our “Quantamental” approach.

This is an analysis process that we have developed over the last three decades and is a quick way to analyze the potential of a stock.

As a reminder, our "Quantamental" analysis is not a formal stock recommendation but a quick analytical analysis tool to give an initial view of the stock in the short and intermediate term.

We recently completed our analysis of the ten largest companies by market capitalization in the S&P 500. We have also analyzed a few other large companies in the news, such as Visa Inc. (NYSE: V) and NIKE, Inc. (NYSE: NKE).

Today, we will continue with another recent company in the news – cloud-based sales software leader, Salesforce, Inc. (NYSE: CRM).

This San Francisco, CA-based company was founded in 1999 by former Oracle executive Marc Benioff. The company focused on creating software to help companies organize their sales process. Interestingly, one of the earliest investors was Larry Ellison, the co-founder and first CEO of Oracle.

Since its founding, the company has grown tremendously and dominates the sales software business. It was one of the first software-as-a-service ("SaaS") companies and helped revolutionize the monetization of software.

Today, the company employs more than 70,000 people globally and will earn close to $38 billion this fiscal year. It is also currently the 25^th largest company in the S&P 500.

Here is the analysis…

1. Technical Analysis

The company held its initial public offering (IPO) on the New York Stock Exchange in June 2004.

From the original IPO price of $2.75, the stock recently traded at an all-time high of almost $370 per share. That is a 13,454% return over the last twenty years. That’s pretty good!

Here is the chart of the stock over the last decade…

Over the last decade, the stock has gone up more than seven times, which has also handily beaten the performance of the S&P 500.

Like many of its technology peers, CRM shares traded up strongly in the post-COVID period. They traded above $300 per share in early 2021.

For the next year, however, the stock got cut by more than half before bottoming in early 2022.

Since then, it has been a rocket ship! The stock has almost tripled from the bottom roughly two years ago. As we mentioned, it hit a new all-time high just last week.

The strength of the shares and the new high are evident when you look at the chart for the last year. Here is that chart along with the relative strength index or "RSI” …

The stock has had an up-and-down 2024. It rallied +23% to start the year and then decreased by more than -$100 or more than -30% into the summer. This began with a rotation out of the software sector and accelerated with a messy report in late May.

After bottoming on significant volume after that report, the stock consolidated for several months before grinding higher during the Fall. As software stocks began to recover in the last couple of months, CRM joined in and thrust higher over the previous month on the back of artificial intelligence (AI) enthusiasm.

This was capped by last week's report, which gapped the stock to a new all-time high.

Off the back of their most recent earnings report, the stock has spiked even higher. This has pushed the RSI to levels it has rarely seen in the last decade.

Here is a table showing how the stock has performed in the weeks and months after going through this level of RSI...

Over the last decade, buying from these overbought levels has been an unattractive bet. In the next three months, the returns have been negligible, and it is essentially a coin flip whether the stock is up or down.

We like that the stock is a clear “winner” recently and over the long run. It has strong investor support and attention.

However, from a short-term tactical perspective, we do not like buying at these levels. The average returns could be better, and we don't like entry points that are coin flips.

TECHNICAL ANALYSIS = AVOID

2. Earnings Revisions

Our readers know the strongest driver of near-term stock price performance is whether companies beat numbers and see positive earnings revisions.

We refer to them as “earnings” revisions, but they can also be revenue revisions. We usually look at not only the most popular measure - earnings Per Share (EPS)but also other measures, such as Earnings Before Interest, Depreciation, and Amortization (EBITDA).

Like most well-established companies, the EPS numbers are the most widely followed at CRM.

Here is a chart of the stock price versus the fiscal year 2025 EPS estimates for the company…

The green line represents earnings estimates, and you can see that CRM has seen consistent upward earnings revisions in the last year.

As mentioned above, the post-COVID technology slowdown impacted the company, which saw numbers move lower throughout most of 2022. The stock followed.

They raised guidance significantly in early 2023, and numbers jumped higher. From there, they have ground higher over the last two years. CRM has been remarkably consistent.

The company also has a strong track record of beating earnings expectations. This table shows their actual reported numbers compared to the analyst estimates for the last five years…

It is not that relevant to the stock today, but – wow – this company had an imposing period of absolutely CRUSHING earnings during the COVID period. They were really able to harness the COVID technology wave and capitalize on it in their earnings.

More recently – as the company is much larger – the beats have been smaller. It gathered little attention, but they technically missed slightly on this most recent quarter.

They also have been reporting minimal revenue beats in recent quarters. Here is that table…

The company is undoubtedly not crushing it on either revenue or EPS.

The company was up so strongly in this most recent quarter because of their forward guidance. They raised it, although not by a huge amount.

The stock benefitted from the optimistic discussion around AI from their charismatic CEO Marc Benioff.

While the move in the stock is rather large relative to the earnings estimates, we believe the momentum likely continues. On this basis, the stock remains a buy.

EARNINGS REVISIONS = BUY

3. Earnings Growth

The final measure we focus on is the actual growth in earnings.

While earnings revisions drive a stock higher in the short term, earnings GROWTH drives a stock higher in the long term.

In our INVESTING strategies, we are looking for companies that will grow EPS from $1 to $10. If you can find those stocks, you can make a LOT of money.

Here is the table for the EPS results of CRM over the last ten years…

The earnings performance better explains the outstanding performance of the stock price.

Over the decade, they have grown EPS almost twenty-fold. That is impressive growth.

It is also impressive that after digesting the COVID sales bump and the post-COVID technology slowdown, the company saw a significant uptick in EPS again in the last year.

This demonstrates that the company has real operating leverage in its business model.

We suspect this is why the stock has acted so well on Benioff’s optimistic AI commentary despite not much movement in revenue or earnings guidance. He has a history of delivering on big promises.

Clearly, investors think he is going to deliver again.

CRM is an interesting stock relative to its technology company peers. The pace of earnings growth seems to move in more of a "stairstep" function. This is when earnings gap higher over a short period to a new base.

We have doubts about the near-term scalability of AI profits for technology companies.

It reminds us of the build-out of Internet infrastructure in the late 1990s. Eventually, all that infrastructure was utilized, but it took years – and some significant profit downturns – before the capacity was used.

However, given Benioff's track record in recent years, we would give him the benefit of the doubt. It remains a buy based on earnings growth.

EARNINGS GROWTH – BUY

Conclusion

CRM attracted our attention because of the big move-up in the stock.

Our "Quantamental" approach does not like buying overbought stocks that don't have a high probability of moving higher in the near term. Even the best stocks for the long term can have unattractive entry points.

CRM fits into that category.

Given the stock strength, we were also surprised by the level of earnings revisions. The operational momentum is not nearly as strong as we would have thought.

We can’t argue with the fact that this company is a “winner” and – until proven otherwise – it will remain so in the intermediate and long term.

However, we don't like the entry point in the short term. On that basis, we would AVOID CRM shares for now.