NEW YORK (TheStreet) –- Why are shares of a technology company that reported 40% revenue growth only up about 9% the day after?
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To me, Salesforce's second-quarter earnings, reported late Thursday, removed any doubt CEO Marc Benioff plans to concede any market share to new cloud entrants.
Yet, there's that Wall Street reaction. Shares, at close to $61, are up 10% for the year to date. The stock is still below my target of $65 per share.
The stock still trails the tech sector's 10% gain, according to Morningstar, and is down more than 1% since the beginning of July. Why?
Consider, the company is growing almost every important metric by more than 30%. During the quarter, Salesforce generated $246 million in cash, up 34% year over year. The company posted deferred revenue of $2.35 billion, up 31%. And when you factor the $5 billion of unbilled and deferred revenue (revenue under contract but not yet on the books), Salesforce is undervalued by at least 10%.
Has Wall Street become less enthused with Benioff's growth-at-all-cost mentality? To some extent this may be why shares of Salesforce have suffered since July. What I think is important to consider is the degree to which Benioff can extract higher long-term profits from Salesforce's increased market share. With the company projecting full-year revenue growth to be between 31% and 32%, a few basis point increases in gross margin can turn Salesforce into a strong profit producer.