Salesforce.com, Inc. (NYSE:CRM) will report its fourth-quarter earnings after Tuesday’s bell, and based on the charts, it looks like investors are optimistic. CRM stock has jumped nearly 20% for the year-to-date.
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But the markets have broadly been in bull mode of late, with plenty of participation coming from the tech sector. And investors still have been harsh when expectations haven’t been met — just ask Hewlett Packard Enterprise Co (NYSE:HPE).
For the current quarter, investors expect Salesforce earnings of 19 cents per share, which would be in line with last year’s numbers. Meanwhile, revenues are forecast to hit $2.28 billion, up about 26% on a year-over-year basis.
But don’t expect a beat to be an automatic green light for investors. Salesforce reported a beat-and-raise Q3 back in November, yet CRM stock went on to drop from $77.77 to $68.41 over a couple of weeks.
The Cloud and CRM Stock
Salesforce.com has a quality platform that should continue to benefit from the mega-shift to cloud computing. According to a report from Gartner, this trend is expected to affect more than $1 trillion in information technology spending by 2020.
CRM has benefited from its laser focus on the cloud opportunity, which stretches back to the late 1990s — far earlier than most people even gave the cloud a second thought. But the payoff has been substantial, driving Salesforce to a $57 billion market cap.
But there are some risk factors to keep in mind.
Early on, Salesforce got some help from the slow response of other tech operators. Many companies were reluctant to disrupt their existing lucrative contracts and arrangements. After all: Why rock the boat?
But the impact of competition on CRM stock has been too overwhelming to ignore. Oracle Corporation (NYSE:ORCL), International Business Machines Corp. (NYSE:IBM), SAP SE (ADR) (NYSE:SAP) and others have ramped up their cloud efforts both organically and through acquisitions.
Competition is a threat to any company, but the pack is closing in on CRM awfully quickly, and that could dampen the growth path.
Other Issues at Salesforce
Something else could end up hampering Salesforce: its aggressive dealmaking.
During the past year, CRM has acquired nearly a company every month. And some have had steep price tags. The purchase of Quip came to $750 million and Krux sold out for $800 million. Then there was Demandware, which Salesforce bought for a cool $2.8 billion.
Salesforce’s quick pace of M&A could be interpreted as an admission that organic growth is becoming much more difficult to churn out.
And let’s not forget: Salesforce even tried to buy Twitter Inc (NYSE:TWTR) despite a strategic rationale that was … well, fairly tenuous.
Salesforce has been skilled at keeping up the growth rate despite these and other issues. But as it related to Tuesday afternoon’s earnings report? CRM stock has already staged a major move to the upside that appears to have factored in just about any potential good news.
If you’re not already in Salesforce stock, it’s probably best not to get involved ahead of this report.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including Taxes 2017: Saving A Bundle. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.