What to make of the Salesforce result
I’ve been watching US equities very closely over the past few sessions – looking for some direction that may translate into Asian markets and Australia in particular. One of the key results that stood out to me yesterday was the Salesforce numbers – huge on face value but below market expectations.
The key is market expectations – very rosy assumptions to justify lofty valuations. This to me suggest equities have hit a ceiling and if the US Fed does move rates higher – which I think they will – in the fourth quarter, equities prices are primed for a pullback.
Let me explain the Salesforce numbers in a bit more detail. This is a business that is generating quarterly revenue of around US$2.4bn and on its way to a US$10bn year. But it has noted that things started to slow down towards the end of the quarter. There were some currency nasties and one off items here or there. No problem at all with the business or what they plan to do (I actually think Salesforce is one of the best placed stocks to benefit from the rollout of Artificial Intelligence technology).
The problem is not the revenue base or the earnings numbers. The problem is the valuation, that is why the stock fell high single digits just after the release, it recovered slightly, but very difficult to see how it can hold on to its current stock levels given the valuation implied.
We’re talking about a stock that reported quarterly earnings of US$0.24 but is trading at around US$76 per share as of the time of writing. Just annualising that number and forgetting about consensus forecasts for a minute, implies a price to earnings ratio of around 80x or business yield of 1.25%. US 10 year bond yields are at historically low levels of around 1.5% – the stock is trading below the long term bond yield at a time when yields have never been this low.
The argument is Salesforce has earnings growth potential and bonds don’t. I get that, but everything must come at a price. To me, Salesforce should be trading at around US$50-60 max and the entire tech space in the US market for that matter needs a similar type of re-adjustment in valuation.
In 2014, Invast published similar views on the major Australian banks. When everybody was calling ANZ a $40 stock, we put out research to our clients calling it at $25 implied valuation. We didn’t have a crystal ball, we just did not buy into the emotion of the market and focused on the fundamentals.
Salesforce is an amazing business, an exciting business and a fantastic growth story. But it is overvalued and the recent earnings call highlights that. We’re preparing for a readjustment in equities prices through September and October as the Fed prepares to raise rates. Exact trading opportunities will be published to Invast clients only.
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Chief Market Analyst
Peter Esho is a member of Invast’s Investment Committee and Chief Market Analyst at Invast Financial Services in Australia. The Invast’s Investment Committee constructs professionally constructed global thematic portfolios of Direct Market Access (DMA) CFDs over highly liquid global shares and ETFs through its new PortfolioInvestor platform. Since 1960, the Invast Group has grown to become one of the largest and most successful global brokerage firms, offering state-of-the-art trading technology and unparalleled service catering to all levels of traders.
Invast Financial Services Pty Ltd (ABN 48 162 400 035) is regulated by the Australian Securities and Investments Commission and holds an AFS Licence 438283 which authorises it to carry on a financial services business in Australia.