A 3% jump
in Wednesday’s session was just what shares of Salesforce (NYSE: CRM
) needed. Since hitting an all time high back in August, they’ve been setting consecutively lower lows and have given up close to 20% of their value. It could be argued that a lot of this retracement is due to the higher interest rate environment that we now find ourselves in, an environment that has disproportionately affected tech and growth stocks more than any other sector.
The thinking here is that as inflation prints continue to tick higher, the Federal Reserve will be forced to raise rates to stop the economy from overheating. We’re already seeing bond yields trading well above their six and twelve-month averages in anticipation of this and one needs only to see how much the tech-heavy NASDAQ is lagging its peers to get a sense of what this means for tech stocks. Higher interest rates hurt the present value of future earnings, while also making it more expensive for growth stocks to borrow money to fuel their expansion. Hence the contraction.
Even though it commands a market cap of more than $200 billion, Salesforce is still considered a tech stock if not an out and outgrowth stock and that’s what many of their customers are. Their price-to-earnings ratio of 50, even with the recent softness, also suggests Wall Street still views it as a long-term growth name. All this means that for those of us on the sidelines, Salesforce shares are giving us plenty to think about
Considering The Opportunity
While you never want to catch a falling knife, there are signs that Salesforce shares have put in a low, at least for the short term. They had traded down towards $200 in early March but hit some decent support and found a consistent flow of buyers at that price. A higher low was put in at the end of March, and a higher one again last week. This tells us that the big money is starting to pick up shares on every dip, and given the sellers were unable to get the stock below $200, the technical momentum has swung to the upside. The stock’s RSI is moving off the low 30s and its MACD is about to have a bullish crossover on the daily chart. All of these signs suggest there’s strong momentum to be found on the bid right now.
In addition, some of Wall Street’s heavyweights have started to row in behind the company. Morgan Stanley was out with an upgrade to Salesforce shares yesterday, as they moved them from an Equal Weight to a Buy rating while also upping their price target to $270. Thinking you’ve spotted an attractive technical setup is one thing, but having someone like Morgan Stanley identify an upside of more than 20% from the current price is another entirely.
Analyst Keith Weiss and his team see three key catalysts that should help Salesforce with "getting its mojo back". These include “billings and booking metrics reflecting the improved demand trends with the economic reopening, proving out the strategic rationale for the Slack acquisition once the deal closes, and providing a more constructive margin outlook.”
Long Term Potential
Morgan Stanley’s bullishness builds on that of Bank of America’s, who last month reiterated their Buy rating and $275 price target. They’re particularly excited about the “long runway for 17%+ organic revenue growth, which is led by front office digital transformation among enterprises.” And in March, Wedbush's Dan Ives wasn’t afraid to start calling the sell-off overdone in the context of Salesforce long-term potential.
This is all solid stuff for those of us now considering a long position, as shares have put in a low and are now moving up on the back of bullish sentiment. They were bought right up into yesterday’s close and were holding onto their gains in Thursday’s pre-market session. Don’t be surprised if we start seeing a few of the bears who’ve been in control for the past six months start to throw in the towel, as the momentum is firmly with the bulls for now.
Salesforce is a part of the Entrepreneur Index, which tracks some of the largest publicly traded companies founded and run by entrepreneurs.
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