Salesforce (CRM) has hit my $185 a share target price. I’m selling it out of my Jubak Picks Portfolio with a 37.42% gain since I added that position back on November 1, 2018.
Why sell rather than up the target price? A couple of four reasons for what amounts to taking a breather on these shares.
First, I remember that back in November 2018 when I added this position, I felt that the target price was already aggressive.
Second, a “feeling,” no more than a guess really, that the rally off the March lows is looking like it’s heading for a pause. (For Salesforce in particular, the stock at today’s close of $188.32, is above the February closing high at $187.01.)
Third, after winning a leading position in the market of salesforce automation (a market share of 33%), Salesforce faces new challenges as it tries to expand its reach as a cloud-based digital marketing company. That has exposed the company to new competitors, the most “dangerous” I’d say is Adobe (ADBE) with its Digital Experience suite, but the group also includes IBM (IBM), Oracle (ORCL) and SAP (SAP). Salesforce has a less dominant position in this wider market (which has led to an aggressive schedule of acquisitions) and that to me forecasts higher expenses and more uncertainty that should be reflected in a lower multiple for the shares, which currently sell at 63 times the forward Wall Street forecast for earnings per share. (Morningstar projects an 18% compound annual average rate of growth for earnings over the next five years.)
And fourth, as the first quarter earnings report suggests, Salesforce revenue and earnings now have an extra element of unpredictability thanks to the coronavirus slowdown and the company’s own growth strategy. In the guidance issued along with the first quarter report, Salesforce lowered expectations for the full 2020 year and reported a lower than expected non-GAAP operating margin of 13.1%, down from 18.2% in the first quarter of 2019. Salesforce margins have been more volatile than I would like at this PE level as the company has been on something of an acquisition spree to build up its position in the cloud-based digital marketing segment. The volatility may also be a result of the coronavirus uncertainty on the revenue recognition policies of all technology companies that have to make assumptions on how to book sales contracts that generate revenue over a long stretch of months. The potential revenue recognition uncertainties are, I believe, something to watch across the technology sector in the upcoming reports on June quarter earnings. But this uncertainty is another reason that I don’t want to push my target price too aggressively at this moment.
