Will Salesforce earnings live up to market expectations?

As Salesforce gear up for their latest earnings release (4 June), traders are looking at this unique firm for a potential breakout following four months of consolidation in their share price.

Widely heralded as one of the fastest growing tech companies in the world, the company has been gobbling up other firms at an incredible rate. Traditionally known for their customer relationship management (CRM) services, the company has become ingrained into the business practices of other companies worldwide, to the extent that many of those firms would struggle to operate without the information provided to them by Salesforce. However, Salesforce also offer a whole host of other services, and it is this constant expansion that has caught the attention of investors, driving a surge in the share price over the course of the past two years. This highlights the issue that dominates shares for boundary pushing firms like Tesla, Google and Amazon.

The greater the firm’s complexity and the greater role conjecture takes in calculating future profitability, the more likely we are to see mispricing. For Salesforce, that takes form in an incredible price-to-earnings (P/E) ratio of 175 (Amazon is 80). To justify such lofty expectations, we will need to see greater financial output from these assets that the firm has built up.

Keep an eye out for whether we do see that rise in earnings per share (EPS) that is needed to improve the P/E ratio number.

Benioff sheds shares in May, yet research houses remain confidence

Some could worry after substantial sales of CRM stock from chief executive officer (CEO) Marc Benioff. The month of May has seen a raft of sales, totaling around $12 million. However, coming from a someone who holds roughly $6 billion worth of Salesforce stock, this is a drop in the ocean.

Research houses appear bullish on the firm, with buy ratings in place from the likes of Nomura and Canaccord Genuity, while Exane BNP Paribas and BMO Capital Markets maintain an outperform rating.

What do the charts tell us?

Charting-wise, we are at a very interesting position for the firm, with recent losses taking the price back into the critical support level of $150. With volatility likely to ramp up around the earnings release, whether we see a break below that level will be key to forthcoming price action. The trend is clearly very bullish, pointing towards further upside to come. However, such a $150.00 break would signal a retracement of the $113.73-$167.52 rally.

For the shorter term, we can see clear respect of the $152.38 level, and traders should watch for how the price responds to this point as a driver of near-term sentiment. We have trendline support coming into play before long, pointing towards the strong possibility that we will ultimately rebound from this support zone rather than break lower. However, traders should be aware that given the close proximity to the key $150.00 support level, we could see a significant period of downside if the earnings figures fail to justify the elevated P/E ratio.