Salesforce.com (CRM) is scheduled to report their fiscal Q3 results tonight after the close. The options market is implying about a 6.5% move in either direction or about $8.50, which is very rich to the 1.8% average over the last four quarters, but shy of its ten-year average one-day post-earnings move of about 6.5%. With the stock about $126. the Nov 30th weekly 126 straddle (the call premium + the put premium) is offered at $8.50, if you bought that, and thus the implied movement between now and Friday’s close, then you would need either a rally above $134.50 or a decline below $117.50 to make money. To put this quarter’s implied move in perspective from last quarter, the stock was trading $155 the day or Q2 results, and the Aug 31st weekly straddle was offered only at $6.50, or an implied move of ~4%.
Despite being down 23% from the stock’s 52-week and all-time highs made on Oct 1st, shares of CRM are still up 22% on the year, and up 10% from last week’s intra-day lows. The one year-chart looks very similar to that of the other high growth, high valuation tech stocks that have recently shared CRM’s correction fate, escalator up, elevator down:
Even after the stock’s recent sell-off, analyst sentiment remains off the charts with 38 Buy ratings, only 4 Holds and No Sells, with an average 12-month price target of just below $173.
CRM trades about 46x expected eps growth (adjusted) of 9% in fiscal 2020 (next year), which is set to decelerate from 80% this year, while sales growth in fy2020 is expected to see deceleration to 20%, placing the stock at about 6x sales. For comparison sake, ADBE which sports a slightly higher market at cap $112 billion (vs $95 billion for CRM) trades richer an astounding 10.5x expected sales this year of $10.8 billion growing at an expected rate of 20% in 2020.
So what’s the trade? We are clearly in a shoot first and ask questions later mindset as it relates to earnings and guidance for stocks like CRM. I see a sort of one up two down scenario. Also, given the stock’s sharp decline over the last two months it would take a meaningful miss and/or guide down for the stock to be down in-line with the implied move, and a it would take a pristine quarter and guidance, and a stable broad market for the stock to go up in line with the implied move.
If I were looking to play for a miss and guide down I might use weekly options and play for the move this week, I might consider weekly put spreads, for instance:
Bearish Trade Idea: CRM ($126.20) Buy Nov 30th weekly 125 / 115 put spread for $2.50
-Buy to open 1 Nov 30th weekly 125 put for 3.70
-Sell to open 1 Nov 30th weekly 115 put at 1.20
Break-even on Nov 30th weekly expiration (Friday):
Profits of up to 7.50 between 122.50 and 115 with max gain of 7.50 at 115 or lower.
Losses of up to 2.50 between 122.50 and 125 with max loss of 2.50 at 125 or higher.
Rationale: For those convicted that the company will miss and/ or guide down and the stock will re-test last week’s lows in the coming days, this trade idea offers a defined risk way to play for a $10 move in three trading days, risking 2% of the stock price to possibly make up to 6%.
If I were inclined to play for a beat and solid guidance I would look for the stock to recapture at least half of the stock’s losses since its highs but I would look for this to occur over a matter of weeks, rather than days… for instance:
Bullish Trade Idea: CRM ($126.50) Buy Dec 130 / 145 call spread for $4
Buy to open 1 Dec 130 call for $4.60
-Sell to open 1 Dec 145 call at 60 cents
Break-even on Dec expiration:
Profits of up to 11 between 134 and 145 with max gain of 11 at 145 or higher
Losses of up to 4 between 130 and 134 with max loss of 4 below 130
Rationale: call spreads out a few weeks are not particularly attractive as options premiums are fairly elevated and short-dated call spreads in the weeklies obviously look more attractive given the lower premiums.