Salesforce Shares Are Down, But Here’s Why Q3 Was Quite Positive

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Salesforce’s third quarter print had everything right with it, except for 2021 guidance. This was problematic for investors, but analysts were quick to remind why the quarter reinforces the bull thesis on the stock.

 Before we get to the analysts, let’s review the facts first. Adjusted earnings per share for the third quarter of 2019 came in at 75 cents, beating Wall Street estimates of 67 cents and growing 23%. Revenue was $4.5 billion, beating analysts estimates of $4.44 billion and growing 33% year-over-year. Subscription and support revenue, which account for the majority of the company's revenue, was $4.24 billion, beating estimates of $4.161 billion and growing 32%. 

Revenue guidance for fiscal year 2020 beat analysts' forecasts, but 2021 revenue guidance was weak. The company expects 2020 revenue to be between $16.99 billion and $17 billion, beating analysts forecast of $16.92 billion. But the company expects 2021 revenue of between $20.8 billion and $20.9 billion, missing analysts hopes for $20.95 billion. 

Salesforce is looking for 2020 adjusted EPS of between $2.89 and $2.90, better than analysts expectations of $2.86. The stock fell 3.66% to $155.66 a share Wednesday. But analysts didn’t budge, as many of them maintained their price targets, with at least one raising it. 

Expectations may have been higher than what the consensus numbers would dictate. In late November, Salesforce hosted an analyst day, where CEO Marc Benioff said he expects the company’s revenue to double by 2024. The last thing investors wanted to see in that case was disappointing guidance. "Given the strong quarter, the recent Analyst Day, and the unchanged annual [2020] revenue guidance, we would not expect a strong reaction to the print either way from investors,” wrote Goldman Sachs analyst Heather Bellini in a note, referencing a 1% down move on the stock, before the loss became more pronounced. 

But here’s the rub: “We believe the company is taking a conservative stance having never guided CRPO in a 4Q period before and 4Q is the biggest quarter,” wrote RBC Capital Markets analyst Keith Weiss. "Nice beat, conservative guide, that's the stock we like to buy.” Moreover, most analysts still forecast revenue growth of over 20% or more for the next several years, which comfortably gets the annual revenue past the doubling mark by 2024.