Salesforce.com (CRM) will report its FQ2 earnings today after the close. The options market is implying almost a 5% one-day move in either direction tomorrow, which is rich its 2.5% average over the last four quarters,
Shares of CRM are up 33% on the year, up 4% today at a new all-time high after last night’s announcement that the stock will join the Dow Jones Industrial Average, replacing Exxon. The stock’s gain is due to the perceived demand for shares of index funds that track the Dow.
Earlier this month the stock bounced off of the uptrend that has been in place since the March lows and is now on a runaway breakout with no overhead technical resistance:
Wall Street analysts are overwhelmingly bullish on the stock with 36 Buy ratings, only 4 Holds and 2 Sells with an average 12-month price target of $210, below where the stock is trading.
Expectations were just made a tad higher into the print with today’s gap, but I like my friend Jared Weisfeld’s, (Tech Specialist from Jeffries, who you might have seen last night on CNBC’s Fast Money with me) take on the set up into the tonight’s print:
Consensus is sitting at ~14% y/y billings growth, a marked deceleration from last quarter’s 20% y/y growth. The Company has flagged guidance as conservative so there’s certainly upside expected across the board here. Investors would like to see reported y/y billings growth close to 20%. From a CRPO perspective, the Company guided cRPO growth to 16-17% in Q2 ($14.1BN). Investors also want 20% here, which would still mark a sequential deceleration vs. last quarter’s y/y growth of +23% y/y, not to mention that Fx should also be a sequential tailwind here (most thinking ~100bps). From a guidance standpoint, the street is sitting at 14% y/y cRPO growth into the October quarter. Given historical conservatism, an in-line guide would be viewed as acceptable, assuming a nice beat in the July Quarter.
And here is a take from Credit Suisse’s Tech Specialist and a very old friend of mine Rob Rupple:
Specialist Commentary: Brad Zelnick previews FQ2 results on 8/25 and although CRM remains a strategic vendor for organizations near term demand is being impacted by customers delaying digital transformation projects. Some encouraging signs in FQ2/Q3 in the government vertical, but the overall the pipeline remains a work in progress. That said, Brad remains constructive on the stock ahead of results as near term headwinds are more than reflected in current expectations (FQ2 RPO -3% q/q vs +2% average & Billings of +22% vs 3yr average of +29%; while FQ3 RPO at +3.2% and Billings +14% q/q) as CRM should benefit into the recovery.
So what’s the trade?
Yield Enhancement: If I were long the stock I might consider selling some out of the money short-dated calls near the implied move to add a little yield as the best-case scenario might be for a 4-5% upside rally given the stock’s run into the print.
vs 100 CRM shares long at $216 sell 1 Aug 28th 225 call at $2.50
Break-even on Aug 28th expiration:
Profits of the stock up to 225 with the added $2.50 in yield taken in from the call sale for an effective Callaway level at $227.50, up 5.3%
Losses of the stock below $213.50 as the short call premium serves as a small buffer to the downside.
If the stock is above 225 prior to expiration on Friday you could always cover the short call to keep the long stock position intact.
Hedge: If you thought the stock has more potential downside on a miss and guide lower than upside on a beat and raise and want to further define your downside risk you might consider a collar:
vs 100 CRM shares long at $216 Buy Sept 230 / 205 collar for 50 cents
-Sell to open 1 Sept 230 call at $3.50
-Buy to open 1 Sept 205 call for $4
Break-even on Sept expiration:
Gains of the stock up to 230, called away above, but can always buy to cover short call prior to expiration if the stock is at or above 230 to keep the long stock position intact (profits reduced he 50 cent premium paid for the hedge)
Losses of the stock down to 205 (plus the 50 cent premium paid for the hedge) but protected below.
Bearish: If you are looking to play for a miss and guide lower I might consider playing for a retest of support near $195 at the uptrend…
Bearish Trade Idea: CRM ($216) Buy Sept 210 – 195 put spread for $3.75
-Buy to open 1 Sept 210 put for $5.50
-Sell to open 1 Sept 195 put at $1.75
Break-even on Sept expiration:
Profits of up to 11.25 between 206.25 and 195 with max gain below 195
Losses of up to 3.75 between 206.25 and 210 with max loss above 210
Rationale: this trade idea risks less than 2% of the stock price for a few week play back to support.