Salesforce Continues To Lose Ground: Should You Hold On?

It’s been around half a month that salesforce.com Inc. (NYSE:CRM) has reported second-quarter fiscal 2017 results. Since then, shares of the company have been on a downtrend.

Why are Shares Slipping?

Since its last earnings release on Aug 31, the stock has lost over 8%. The drop was because of the company’s tepid near-term guidance rather than the quarterly numbers.

For the third quarter, Salerforce anticipates revenues in the range of $2.11 billion to $2.12 billion, lower than the Zacks Consensus Estimate of $2.13 billion given at that time.

Moreover, Salesforce lowered its fiscal 2017 non-GAAP earnings per share guidance range to the range of 93 cents to 95 cents from its prior projection of $1.00–$1.02.

The soft third quarter and fiscal 2017 guidance reflects weak sales witnessed around the end of the second quarter. Moreover, Salesforce anticipates unfavorable foreign currency exchange fluctuations to negatively impact its performance in the forthcoming quarters.

Some of the pessimism surrounding the stock may also be attributed to sluggish growth in deferred revenues. Deferred revenues can be referred to money that the company has contracted for, but hasn’t billed yet. In other words, it refers to the revenues that the company expects to earn or receive in the near future.

In Salesforce’s case, though deferred revenues in the second quarter were strong, having recorded a 27% year-over-year jump, it was not better than the 32% surge witnessed last quarter and the 33% upside in the year-ago quarter.

In addition to these factors, the loss of one of its biggest customers, HP Inc. (NYSE:HPQ) , to Microsoft Corp (NASDAQ:MSFT) dampened investor confidence in the stock to some extent. As a result, Salesforce’s shares were down approximately 1.8% to $73.06 yesterday.

Salesforce has had business relations with HP since 2012, when the latter signed an agreement to use the former’s CRM tools, cloud services and other related offerings. Moreover, this was Salesforce’s biggest deal in 2012.

Troubles to be Short-Lived?

We believe that the weakness seen in Salesforce’s shares is temporary, as the aforementioned factors will hurt its short-term results only. The company’s long-term prospects are still bright on the back of its continued investments in international growth and data center expansion.

Furthermore, Salesforce’s strategy of growth through acquisitions is commendable. Over the past few years, it has acquired or partnered with a number of companies. This year alone, Salesforce has completed, or is in the middle of, as many as 10 acquisition deals, which include the recently concluded Demandware buyout.

Cloud computing is a flourishing segment of the technology sector, having gained significant momentum over the past few years. As a result, many companies are now acquiring assets across the world to achieve long-term goals.

We believe that Salesforce’s sustained focus on expanding its business through strategic acquisitions and investments will drive growth over the long run.

Going forward, we expect rapid adoption of the Salesforce Customer Platform to be a big positive. The company’s diverse cloud offerings and considerable spending on digital marketing would be other catalysts.

Note that in view of increasing customer adoption and satisfactory performances, market research firm Gartner has recognized Salesforce as the leading social CRM solution provider. We believe that increasing adoption of Salesforce’s platforms indicates solid growth opportunities in the ever-growing cloud computing segment.

Currently, Salesforce carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Ambarella Inc. (NASDAQ:AMBA) , sporting a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Interested in IPOs? Check out the special edition of Zacks Friday Finish Line below, where Editor Maddy Johnson and Content Writer Ryan McQueeney interview Kathleen Smith of Renaissance Capital about the IPO market in 2016 (see part two here).

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>