Getting Salesforce on the Cheap
Here's how this non tech investor is taking advantage of the software firm's big selloff.
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I initiated a new position in tech giant Salesforce CRM early on Friday. It is the first time I have held a stake in this best-of-breed CRM software firm in many, many moons.
The stock's nearly 20% selloff on Thursday was its worst daily performance since back in the Great Financial Crisis. The stock did recover just over a third of those losses on Friday.
Let’s start with the statement that Salesforce’s fiscal first-quarter results were not terrible. The technology leader delivered earnings of $2.44 per share, more than a nickel a share above estimates. Sales grew just under 11% on a year-over-year basis to just north of $9.1 billion. However, that was approximately $20 million light of expectations. More importantly, the last time Salesforce didn’t meet or exceed its quarterly sales estimate, Barack Obama occupied the White House, and was in his first term. In addition, forward guidance was slightly softer than hoped for.
Management mentioned that some deals took longer to close in the first quarter as corporations prioritize spending on AI. Salesforce is hardly unique in the tech sector experiencing these headwinds.
As Doug Kass has been writing in his Daily Diary on TheStreet Pro for around six months now, all the massive increases in AI spending happening in much of corporate America have to come from somewhere. Based on numerous first-quarter earnings reports, one of those places is through reductions or delays to other parts of companies’ tech budgets.
The good news is that Salesforce is diving headfirst to embrace and utilize AI in its own customer offerings. It certainly has some assets to do so as the platform manages about 250 petabytes of data that can feed into AI models.
The company’s Data Cloud has increasing AI capabilities and was included in one-quarter of the Salesforce’s deals of over $1 million in the first quarter. Management is certainly focused on building out AI functionality as the subject was the focus of a good part of the conference call that followed the quarterly press release.
With the selloff on Thursday, CRM's PEG (P/E to-growth) ratio got down to roughly 1.2 when most leaders in the tech sector sport PEGs of 2 or higher. The company’s balance sheet is in terrific shape and the company delivered just over $6 billion in free cash flow during the first quarter. To put this in perspective, CRM stock closed Thursday with a market cap of just over $210 billion.
My regular readers know that for the most part I am not a big tech investor. But Thursday’s pullback brought CRM into my value range for the first time in memory.
Here is how I took an initial stake in the equity early on Friday.
Option Strategy:
Here is how one can establish a position in CRM using a covered call strategy. Remember, covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
Selecting the January $220 call strikes, fashion a covered call order with a net debit in the $199.00 to $199.50 a share range (net stock price - option premium).
This strategy provides downside protection of 15% across the option duration. This strategy also provides 11% upside potential over the seven-and-a-half-month option duration even if the stock trades down 6% over that time.
At the time of publication, Jensen was long CRM.
