CRM Stock: The Latest Leg Down

Salesforce.com (NYSE:CRM) stock is down, but is it out? Since the start of the year tech stocks have taken two legs down, in late February and now, in early May. CRM stock has joined the party both times. It’s down 3% on the year, while the average S&P stock is up 11%.

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The performance is almost identical to that of Apple (NASDAQ:AAPL), the market’s largest company, only slightly more pronounced.

It’s due to investors rotating out of expensive stocks and into those benefitting from the end of the pandemic or President Joe Biden’s Administration’s infrastructure plans. Even with this latest fall, Salesforce stock sells at 49 times earnings. That won’t change at its next report on May 27, with 42 cents of net income expected on $5.89 billion of revenue.

Growth Too High?

When the pandemic was on, investors piled into the few names that were making money. Cloud application stocks like Salesforce were among those names. CRM stock peaked at $281.25 per share in late August into early September. Over the last year you’re still up 32%.

But there are a lot more places for investors to make money now. You can buy a steel stock like Cleveland-Cliffs (NYSE:CLF). You can buy a cement stock like U.S. Concrete (NASDAQ:USCR). You can even grab a cruise line like Royal Caribbean (NYSE:RCL) and be rolling in profits.

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If happy days are here again you don’t need safe-haven stocks like Salesforce, goes the thinking. Work from home plays are out. Get out and do thing plays are in.

Keep on Keeping On

The light is still on at Salesforce. There’s a succession plan in place, with 42-year old Bret Taylor on tap to replace co-founder Marc Benioff as CEO. Top line growth is still averaging 20%, the company continues to make money. Some workers will be able to stay at home permanently, saving more money.

Salesforce profits would be higher, except it’s paying a massive $27.7 billion to buy Slack (NYSE:WORK) and compete more closely in office applications. This is not a bad idea. It’s just bad timing right now to go for growth when the market wants margins.

That will change and, when it does, Salesforce stock will likely come back. The accelerating deflation of the cloud isn’t going away. The financial incentive to automate isn’t going away. Over the last five years CRM stock has averaged returns of 38% per year, almost double the average S&P stock. But it has also seen significant downdrafts in 2018, early 2020 and now.

The Bear Case for CRM Stock

Bears look at the Salesforce stock chart and see bad things.

The previous downdrafts were short and sudden, and CRM stock quickly recovered from them. This last one has seen a succession of lower lows and lower highs, dating from the late August peak. A chart expert looks at that and shakes their head ruefully.

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Most fundamental analysts don’t see it that way. Of 22 at Tipranks, 18 still say buy. They see Salesforce stock returning to those August highs within a year.

The Bottom Line

I disagree with the analysts.

Tech valuations are compressing. It’s not a mirage. There’s no need to pay 49 times earnings for 20% growth when hundreds of companies are going from loss to profit and, at least in the near term, growing just as fast.

This doesn’t mean investors should be abandoning CRM stock. What I said in April still goes. This is a long-term play.

But the fear crowd has left for greener pastures. The greed crowd has left for hotter names. If you have a 10-year time horizon, if you’re an investor and not a speculator, take advantage of the calm.

At the time of publication, Dana Blankenhorn directly owned shares in AAPL.

Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn 


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