Salesforce: Why Take-Out Talk Could Trump Earnings

In a report published Monday, Susquehanna analysts maintained a Positive rating on salesforce.com, inc. CRM, with a price target of $80, ahead of the company's earnings release. Salesforce.com is scheduled to report its 1Q16 results on Wednesday, May 20. The analysts expect the investors to be more focused on take-out related news rather than the company's earnings. The company is expected to report 13 percent y/y growth in billings, down from 32 percent in the previous quarter. "While billings guidance/expectations of a significant stepdown in growth may seem conservative, our checks indicate that CRM benefited from a good deal of contract renewals being consolidated into 4Q, creating some artificial benefit to 4Q billings growth that will somewhat reverse in 1Q," the analysts said. While mentioning that the "trading dynamics" had changed, the analysts pointed out that Salesforce.com's stock was not trading "just on fundamentals," and instead had a "partial take-out premium" that is unlikely to lessen in the near-term. In the report Susquehanna noted, "In fact, if CRM were to miss billings expectations, this could fuel more speculation that CRM would entertain a potential buyout and thus limit downside in the name. If CRM beats expectations, we think the combination of M&A attraction and strong demand conditions will keep interest in owning the stock at elevated levels." "We do caution investors that the swirl of M&A rumors and the resulting conversations that are occurring throughout the industry may cause sales cycles to elongate in 2Q, creating potential risks for the August quarter. That said, we still think the risk/reward of owning the stock in the near term is favorable," the analysts added.