Salesforce.com a Solid Buy Ahead of Earnings, With or Without M&A

NEW YORK (The Street) –- Salesforce.com (CRM) has interested buyers, if you believe the rumors, and it's no wonder given its strong business growth and outlook. This continuing growth should be evident when the company reports earnings Wednesday, making it a strong buy despite the run-up in shares in recent months.

Microsoft (MSFT) is reportedly interested. Before that, the list of suitors had Oracle (ORCL) as the top takeout target. Oracle quickly shot down those rumors, even suggesting it can capitalize if another rival were to acquire Salesforce.com.

Only time will tell where Salesforce.com ends up. And even if the rumor mill runs out steam and nothing happens, the San Francisco, CA.-based company, which will report first-quarter earnings Wednesday, remains a top pick among investors.

Despite CRM stock having already gained 22% so far in 2015, CRM stock still has a consensus buy rating and an average price target off $80, implying that analysts expect 10% gains from levels of around $82. And the stock's highest price target of $95 implies more than 30% gains in the next twelve months. If you thinks 30% stock gains in a year is too bullish, consider the following.

CRM stock has dominated the iShares North American Tech-Software ETF (IGV) not just year to date (up 22% vs. 9%), but also over the past twelves months, gaining almost 41% compared with 28% gains for the IVG. And if you've bought and held CRM stock over the three years, your position is up almost 110%, versus
65% gains for the IGV. Take a look at the chart.

CRM 1 Year Price Returns (Daily) Chart
CRM 1 Year Price Returns (Daily) data by YCharts

All told, CRM stock has averaged more than 30% gains just in the past three years. While that doesn't guarantee CRM stock will deliver the same rate of growth for the next year or even the next three years, there's -- perhaps -- no other company that stands to profit as much from the future cloud growth analysts expect.

Spending on cloud-based Big Data and analytics solutions will soar over the next five years, growing three times faster than traditional onsite server solutions, according to research firm IDC. And hybrid on/off premise deployments, which is a combination of a public and private cloud software, will become a requirement on corporate networks.

This business transition bodes well for Salesforce.com, explaining why CRM stock deserves a P/E of 139 -- almost seven times the average P/E of company's in S&P 500. The company's earnings results Wednesday and outlook for the rest of the year will show how right the market has been in its pricing of CRM stock.

For the quarter that ended April, Salesforce.com is expected to post earnings of 14 cents a share, up 27% year over year, on a 22% year-on-year increase in revenue of $1.50 billion. For the full year, ending in January, revenue is expected to climb 21% year over year, while earnings per share of 69 cents marks a 32% increase from last year's earnings of 52 cents.

The 32% full-year jump in earnings explains why any company may be interested in a deal with Salesforce.com, which grew cloud revenue 33% year over year in 2014.

Plus, while Salesforce.com is no longer posting revenue growth of around 50% as it did three years ago, the company is still beating estimates each quarter, growing revenue by a 30% year-over-year average in the past four quarters. Investors should look forward to more of the same Wednesday and look for CRM stock to climb on stellar results. 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Opinion

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

2 More Reasons to Sell All Your Stocks and Run Away

2 More Reasons to Sell All Your Stocks and Run Away

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast