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Buy Salesforce (CRM) Ahead of Q4 Earnings as Tech Stocks Slip?

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The Nasdaq fell 2.5% during regular trading Monday, driven by Apple (AAPL - Free Report) , Microsoft (MSFT - Free Report) , Tesla (TSLA - Free Report) , and countless other tech firms. The downturn follows a rough week for many of the biggest names on Wall Street, as bond yields rise as the prospect of a major economic comeback mounts amid the vaccine rollout.

Despite the recent setbacks that have pushed the tech-heavy index about 4.5% off its February 12 records, fundamentals still set up a strong 2021. This means investors might want to look at some tech names that are trading at a discount. One stock to consider is Salesforce (CRM - Free Report) ahead of its Q4 fiscal 2021 earnings release on Thursday, February 25.

The Basics

Salesforce helped create the software-as-a-service industry that has been booming for years. The pandemic highlighted the importance of this space and showcased that SaaS is ready to keep growing as businesses of all shapes and sizes adapt to the digital age and rely on various software to help them do just about everything.

CRM’s cloud-based customer relationship management services offer clients a range of tools and applications to help run everything from sales and e-commerce to marketing and analytics. The company also made a splash when it announced in early December 2020 its $28 billion deal—which is the second-largest in software history—to buy Slack.

Some analysts on Wall Street think Salesforce overpaid for the work-focused communication firm (26X forward 12-month sales). Yet, clearly CRM’s executive team, who paid $15 billion in 2019 for data-analytics platform Tableau, believe Slack will prove vital in the digital-heavy business world.

The definitive agreement to acquire Slack is a bet that the business is moving more toward work from anywhere mode after the pandemic. In fact, Salesforce itself plans to allow its employees to work remotely as more people start to return to offices around the country. This could be a sign that more businesses will permanently cut back on travel and office space, which will put an emphasis on non-email communication such as Slack and Zoom Video (ZM - Free Report) .

Other Fundamentals

CRM shares have climbed around 110% in the last three years to outpace its industry’s 67% run. Salesforce has, however, underperformed its space in the past year.

The stock closed regular trading Monday about 15% off its early September 2020 highs. On top of trading well below its records, CRM sits at around a 58 in terms of the Relative Strength Index—an RSI above 70 is often regarded as overbought, with any number below 30 considered oversold.

On the valuation side, Salesforce is trading right in line with its industry at 8.8X forward 12-month sales. This also comes in near its own year-long median and at a 23% discount compared to its own highs over this stretch.

Looking ahead, Zacks estimates call for CRM’s adjusted fourth quarter earnings to pop 14% to reach $0.75 a share, on 17% stronger revenue. This top-line growth would mark a slowdown compared to Q3’s 20%, as well as Q2 and Q1’s roughly 30% sales expansion.

Meanwhile, its fiscal 2021 revenue is projected to jump 23.5% to $21.1 billion, with FY22 expected to come in another 20% or $4.2 billion higher. CRM’s adjusted FY21 EPS figure is expected to surge 55%. Yet, its FY22 earnings are projected to fall below our FY21 estimates, as it spends on growth.

Bottom Line

Once again, Salesforce’s top-line estimates mark a slowdown compared to recent years—it grew by 29% in FY20, 26% in 2019, and 25% in FY18. But 20% growth for a company of its size and age is still rather impressive.

The company’s earnings revisions help it land at a Zacks Rank #3 (Hold) right now. CRM has also destroyed our adjusted EPS estimates recently, with a 135% beat last quarter and a 114% beat in Q2. Plus, 19 of the 25 brokerage recommendations that Zacks has for CRM come in at a “Strong Buy,” with the rest at a "Hold.”

There could clearly be more near-term selling pressure throughout the market. But longer-term investors might want to consider Salesforce as it sits 15% below its fall 2020 records.

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