Salesforce com (SA:SSFO34) stock fell to $2.25 in August 2004. What followed is nothing short of spectacular. Shares closed at $182.31 on Friday, up 8000% or 34% compounded annually. In other words, CRM multiplied investors’ money by 81 in less than 16 years.
However, even traditional valuation measures indicate the stock is getting ahead of itself. No trend lasts forever and we believe Salesforce is not immune to gravity, either. The chart below puts its phenomenal uptrend into Elliott Wave perspective.
The rally to $186.44 so far looks like an almost complete five-wave impulse. The pattern is labeled (1)-(2)-(3)-(4)-(5), where the sub-waves of (1) and (3) are also visible. It looks like the latest all-time high is part of the fifth and final wave.
According to the theory, a three-wave correction in the other direction follows every impulse. The $200 a share mark seems to be within the bulls reach. On the other hand, once wave (5) ends, a notable retracement should be expected. Given Salesforce .com’s stretched valuation, a 40% to 50% decline does make sense. In our opinion, CRM carries more risk than reward at current price levels.