Earnings season is coming to a close, and the markets have had a wild ride, with heightened trade tensions instigating concern. Cloud behemoth, Salesforce CRM, is releasing its July quarter earnings after the bell August 22nd and investors are on the edge of their seat waiting for more color on the company’s most recent acquisitions.
Zacks Consensus estimates for Q2 are an EPS of $0.47 on $3.95 billion in sales, which would represent an earnings decline of over 33% but a sales boost of over 20%.
The Tableau Acquisition
Salesforce closed its $15.7 billion deal for Tableau at the beginning of August. This price represents more than 42% premium from before the acquisition’s announcement back in June. Salesforce management is confident that combining the world’s #1 CRM platform and the world’s #1 analytics platform will provide the merged company with unparalleled synergies.
“Companies of every size and industry are transforming how they do business in the digital age—customers and data are at the heart of those transformations. This creates an incredible opportunity for Salesforce and Tableau, as IDC projects worldwide spending on technologies and services that will enable digital transformation to reach $1.8 trillion in 2022.” – Tableau’s letter to shareholders.
CRM investors aren’t so sure that the collective synergies are worth the excessive premium paid, with its share price falling 8.6% since the deal was announced. Short interest has risen, and analysts have dropped EPS estimates over the last few months. Changes in management guidance will be provided in the earnings report this evening.
Salesforce also just signed an agreement to purchase ClickSoftware for $1.35 billion earlier this month. This acquisition will enhance CRM’s position as the #1 cloud platform for service management. Salesforce and ClickSoftware have been partnering since 2016, so this acquisition and its integration shouldn’t be too costly or time consuming. Management isn’t changing guidance with this purchase.
Salesforce has illustrated unparalleled revenue growth through its subscription-based cloud services. The company has shown year-over-year topline growth that hasn’t fallen below 20% and relentless quarter-over-quarter expansions since its inception.
This unmatched consistency has driven CRM to return shareholders over 1000% returns in the past decade. Salesforce growth stability has allowed investors to be comfortable with excessively high valuation multiples. CRM is trading at a PEG multiple of 2.36x, right below its median 5-year valuation. This valuation metric is coming right above the rest of the computer software industry, which has seen valuations raise as subscription-based models become a norm.
Salesforce has only returned investor 7.5% since the beginning of the year, far underperforming top cloud competitors like Adobe ADBE, Oracle ORCL and Microsoft MSFT.
Salesforces acquisition of Tableau has caused a lot of uncertainty for shareholders and investors. The stock has underperformed the industry and the broader market.
Have investors’ acquisition concerns been overplayed and held CRM down below its intrinsic value? The earnings release this evening will provide much more color on the impacts of the deal to Salesforces financials.
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