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Why it is a Good Idea to Hold Salesforce (CRM) Stock for Now

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At times, it is prudent to hold on to certain stocks that have enough potential but are weighed down by tough market conditions. Salesforce.com Inc. (CRM - Free Report) seems to be one such stock, which investors need to retain if they are looking to reap long-term benefits. Though the stock is facing a few headwinds at the moment, these are transitory in nature. There is enough scope for this Zacks Rank #3 (Hold) company to rebound in the long run. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In fact, Salesforce stock has gained 37.1% year to date, substantially outperforming the industry’s rally of 22.5%.

Aspects In Favor of Salesforce

Continuing its earnings streak for the sixth consecutive quarter, Salesforce posted splendid second-quarter fiscal 2018 results, wherein the top and bottom lines not only fared better than the Zacks Consensus Estimate, but also came ahead of management’s guided ranges. Quarterly revenues and earnings also marked year-over-year improvement.

Significant increase in Salesforce partner certifications has been fueling the top-line results. During fiscal second-quarter conference call, Salesforce announced that its partner certification witnessed growth of five times over the last four years, and more companies are willing to invest in its activities. Accenture has emerged as one of the biggest examples for this. Notably, Accenture is currently a global leader in the Salesforce implementation service space, with over 11,000 skilled consultants.

A number of big organizations, including Amazon (AMZN - Free Report) , 21st Century Fox, Jefferies Investment Bank and Samsung, selected Salesforce solutions during the quarter to drive their digital transformation.

Furthermore, Salesforce broke through the $10-billion run rate and christened itself the first company in the history of enterprise cloud software industry to have achieved this milestone in such a short span of time, including its closest rivals like Microsoft (MSFT - Free Report) , Oracle (ORCL - Free Report) and SAP SE.

Most recently, Salesforce entered into an agreement with Amazon’s Amazon Web Services (AWS) to run its software in the latter’s Canadian data center. This has opened up fresh prospects in the Canadian market. Similarly, Salesforce is planning to do similar thing in Australia, in order to tap growing opportunity in the Asia-Pacific region.

The company also won several deals of late owing to its international expansion initiatives. Companies like Toshiba, Nomura, Queensland Urban Utilities and Australia Post picked Salesforce’s solutions to fuel digital transformation.

The higher number of deal wins and geographical contributions are encouraging. We consider the rapid adoption of the Salesforce1 Customer Platform to be a positive. Overall, the company’s diverse cloud offerings and considerable spending on digital marketing remain catalysts. Additionally, strategic acquisitions and the resultant synergies are anticipated to prove conducive to growth over the long run.

In view of increasing customer adoption and satisfactory performances, market research firm, Gartner, acknowledged Salesforce as the leading social CRM solution provider. Also, just recently Forbes named Salesforce the most innovative company in the world again. We believe that the rapid adoption of Salesforce’s platforms indicates solid growth opportunities in the ever-growing cloud computing segment.

Promising Guidance

The company provided an encouraging guidance for fiscal third quarter and raised outlook for the full fiscal as well. For the fiscal third quarter, the company anticipates revenues in the range of $2.64-$2.65 billion (mid-point: $2.645 billion), representing a year-over-year increase of 23-24%.

The guided range was higher than the Zacks Consensus Estimate of $2.61 billion. Further, the company expects non-GAAP earnings per share in the band of 36-37 cents. The Zacks Consensus Estimate is currently pegged at 35 cents.

Furthermore, the company raised revenues and earnings outlook for fiscal 2018. Revenues are now anticipated to come in the range of $10.35-$10.40 billion (mid-point $10.375 billion), up from the previous projection of $10.25-$10.35 billion (mid-point $10.3 billion), representing 23-24% year-over-year increase. It also comes above the Zacks Consensus Estimate of $10.28 billion.

Similarly, Salesforce now projects non-GAAP earnings to lie between $1.29 and $1.31. This compares with the previous guidance range of $1.28-$1.30 on non-GAAP basis. The Zacks Consensus Estimate is currently pegged at $1.30, in line with the mid-point of management’s non-GAAP guidance range.

The company has an expected EPS growth rate of 26%. Notably, the stock has delivered positive earnings surprises in two of the trailing four quarters with an average beat of 7.1%.

Risks Persist

We note that the Salesforce currently has a trailing 12-month P/E ratio of 469.15. This level compares unfavorably to some extent with what the industry witnessed over the last year. The ratio is higher than the average level of 409.46 and is toward its higher end of the valuation range over this period. Hence, valuation looks slightly stretched from a P/E perspective.

In addition, currency fluctuations and stepped-up investments in international expansion and data centers could hurt the bottom line.

Our Take

We expect the aforementioned factors to help the company sustain its strong momentum and stay afloat amid difficult times. Hence, we suggest that investors hold on to the stock for the time being.

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