As The Sell Side Praises Salesforce, One Analyst Downgrades

Salesforce.com, inc. CRM reported 25 percent revenue growth and 26 percent billings growth for the fiscal third quarter on Tuesday. The bottom line came in ahead of the consensus estimate.

The company's fourth quarter non-GAAP earnings per share guidance trailed Street forecasts, while revenue guidance was ahead. Salesforce also raised its fiscal 2018 revenue guidance.

The Analyst

Roth Capital Partners analyst Richard Baldry downgraded the shares of Salesforce from Buy to Neutral and maintained a $112 price target.

The Thesis

Further price appreciation in Salesforce shares is less likely, given expectations that earnings will decline sequentially in Q4 to absorb high annual conference costs and limited near-term catalysts, Baldry said in a note. 

The Q3 results were good, with revenue upside occurring in the company's core recurring revenue segment, Baldry said. The analyst noted that services revenues were flat, defying a moderate growth trend.

Given Salesforce's greater enterprise emphasis, the analyst sees this as a mild warning signal. Nearly flat operating spending was primarily responsible for the earnings upside, Baldry said.

"Clean execution over the past year (after an outlier cautionary stance post-2QF17) has resulted in CRM rebounding to a leader-centric valuation," the analyst said. Salesforce's rapid growth and recurring revenue model warrants a premium, leader-centric SaaS valuation, according to Roth Capital. 

The Price Action

At the time of writing, Salesforce shares were down 2.11 percent at $106.47. Notwithstanding Tuesday's drop, the company's shares are up over 55 percent year-to-date.

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