CRM: The Force is Strong with this One

Salesforce.com (CRM) is trading 7.9% higher after hours to $146.50 ahead of the CEO on Cramer, and the Company beat by a penny on EPS but beat big on revenues, and along with raising its guidance, it showed new customer adds, the real key to its report as it continues to show itself as the leader in cloud computing, which is still fairly early in the growth stage. In this case it is best to throw away traditional measures of valuation and use a more common sense approach, realizing that cloud computing is going to be the future for every Company and the transition is in the early stages.

I previewed the quarter for subscribers last Sunday:


Earnings Focus
Details: Salesforce.com (CRM), $134.91, Technology - Application Software, Earnings May 19th After Market Close

Earnings Expectations and Keys to the Report: Analysts are expecting $0.27 EPS and $482.45M in Revenues for the Quarter and $1.27 EPS and $2.11B for FY12 estimates. Estimates are factoring in 28% growth this year in revenues. Last quarter subscription revenues grew 31% Y/Y and 5,100 new customers were added in Q4 to a total of 92,300. Analysts and Traders will focus on subscription revenue growth and new customer adds. Also, the launch, and early read on the success of Chatter will be eyed on the Conference Call. Salesforce's $326M acquisition of Radian6 should be a positive moving forward for social media channels, and acquisition costs will cause a discrepancy in the headline Non GAAP and GAAP numbers.

Previous Reports and Reactions: Shares jumped on the report/outlook last quarter, but faded quickly, sinking that day and for a few weeks following the report. In 3 of the past 7 quarters, Salesforce has made a 15% or greater move, while the other 4 quarters the move only averaged 3.5%. The quarter before last resulted in a strong gap up, followed by strong buying to close the day at highs, and then continuation to all time highs.

Technical Analysis: Salesforce shares are making a series of lower highs in a channel down pattern since reaching all time highs in December 2010, recent resistance at $140, and the channel bottom extends to $115, a potential target as it would also fill the November 2010 gap. If shares were to break $140 on earnings a move to $150 would likely be quite easy, and potentially as high as $165/$170. MACD and ADX are showing early signs of turning bullish and RSI is trending higher. Bollinger Bands are tight, and a big move looks imminent. Shares found the 200 day EMA as support in March, and that is currently at $122.50.

Fundamental Analysis: Salesforce shares are undoubtedly rich on valuation at 73X forward earnings, 10.9X sales, and 200X free cash flow, and although that has not mattered in the past, being priced for perfection is a dangerous game, and could result in sharp sell-offs on any negative outlooks concerning growth potential. However, smart acquisitions and customer adds, along with cloud computing still in the early stages leave Salesforce as a leader in the industry that is likely to remain at a valuation premium.

Analysts: Of the 31 Analysts covering Salesforce the average target price is $160, a high of $200. FBR raised shares to Outperform on April 7th with a $170 price target.

Sympathy Movers: VMW, FFIV, CTXS, ORCL

Options Activity, Open Interest Analysis and Volatility Analysis: Salesforce May IV at 65.9% compares to June at 45.27%, so front month volatility is definitely pricing in a move, the straddle pricing in a 7.5% move on earnings, although we have seen many of the high flying Tech names make much less than priced in moves on earnings in recent weeks. The IV Skew has a minor bullish smile for May options and is fairly flat going out to later dated months. Salesforce has not seen a lot of large option trades in recent weeks, notable buying of the May $130/$135 call spreads for 2,500 contracts on May 4th. I feel the straddle is fairly cheap here and expect more than a 7.5% move in shares on earnings considering the recent tight trading range, and historical movements.


Now, on May 17th, just 2 days ahead of earnings there was very bullish options action in Salesforce ahead of the quarter, and I put out the following note to subscribers:

OPTIONS RADAR: Salesforce Call Spreads Active Ahead of Earnings

Ticker/Price: CRM ($129.20)

"Salesforce (CRM) June $140/$155 call spreads with 2,000 bought at $2.50, earnings May 18th, and then another 6,000+ were bought as call volume jumps to 26,500, or 3X daily average with opening bullish buyers, and not seeing any short stock with the spreads. Also, similar bullish action seen yesterday with these spreads and plenty of May $130/$135 call spreads still sitting in open interest. Shares rebounded a bit off support today and are set to close in the green. The larger picture channel down has resistance at $140 and support at $115. Shares of the cloud computing leader trade 69.7X earnings, 9.3 PEG and 10.4X sales, and the recent launch of Chatter could get investors excited this quarter as the Company continues to win new clients. Morgan Stanley noted this morning that it expects a solid print, but remains Equal Weight. "

The action continued today right up until the report, including a buyer of 1,000 May $145/$150 call spreads at 3:28pm, and the 345/350 May ratio 1X2 call spreads also traded in size.

All of my signals were bullish into the quarter, so the spread I recommended late in the day was the May 140/150/155 unbalanced butterfly call spread at $1.75. If shares hold around where they are trading after hours, a big IF as anything can change, the spread should work out very well. For the more neutral traders looking for a safe trade I recommended the May/June $150/$120 Double Calendar Spread, which should also work out very well.



Looking at the chart, shares broke trend resistance late today after a great support bounce at $127.25 two days ago, and on the break of this pattern of lower highs at $140, shares should hit $150 easily, and be well on its way to $175.



Disclosure: Long Calls and Spread Noted Above