Trade Ideas December 1, 2020

Salesforce.com (CRM) FQ3 Earnings Preview / Trade Ideas

by Dan

Salesforce.com (CRM) will report its fiscal Q3 earnings today after the close. The options market is implying about a 6% one day move tomorrow, or about $15.50 in either direction. Shares of CRM rallied 26% the day after their FQ2 results in late August following a massive beat and raise, per Barron’s:

For the quarter, the provider of cloud-based enterprise software posted revenue of $5.15 billion, up 29% from a year ago, and well ahead of the Wall Street analyst consensus estimate of $4.9 billion. Adjusted, or non-GAAP profits, were $1.44 a share, crushing the Street forecast of 69 cents.

For the October quarter, Salesforce (ticker: CRM) sees revenue of $5.24 billion to $5.25 billion and non-GAAP profits of 73 to 74 cents a share; previous consensus estimates were $5.01 billion and 76 cents. For the full year ended January 2021, the company sees revenue of $20.7 billion to $20.8 billion, with non-GAAP profits of $3.72 to $3.74 a share. The Street has been projecting $20.1 billion and $2.96 a share.

“It’s humbling to have had one of the best quarters in Salesforce’s history against the backdrop of multiple crises seriously affecting our communities around the world,” Salesforce CEO Marc Benioff said in a statement. “Salesforce was founded on our belief in stakeholder capitalism and our core values of trust, customer success, innovation and equality …We know that together we have an opportunity to emerge from these times even stronger.”

From the prior four quarters to its last the stock had only moved on average about 3%. The stock has been rangebound since the last quarter, consolidating much of the stock’s ~50% ytd gains between $230 and $270:

Expectations are clearly high for results and guidance but the main piece of news will be the reports from the WSJ that CRM is in talks and likely to announce a deal that could be as high as $25 billion to acquire collaboration software provide Slack (WORK). This purchase price would present nearly 10% of CRM’s market cap.

Wall Street analysts are overwhelmingly positive on shares of CRM, with 36 Buy ratings, 6 Holds, and only 1 Sell, while they are far more mixed on WORK with 11 Buys, 10 Holds, and 5 Sells (a few which have come since the stock spiked on the media reports).

CRM is clearly being opportunistic with its stock price as currency, but I suspect this might have been a competitive situation and they see a very strong strategic fit.

To my eye, the stock has near-term downside risk to $230, the Oct low and August breakout level, and staunch upside technical resistance between the Oct/Nov highs at $270 and the all-time high in early Sept near $285:

 

What’s the trade? 

If I were long and uncertain of how investors might react to one of the largest software deals in history, but don’t want to sell but want to define near term risk I might consider a collar, selling an out of the money call and using the proceeds to buy and out of the money put. This hedge structure allows for gain up to the short call strike, losses down to the long put strike, but protected below, for instance:

Hedge Idea vs 100 shares CRM long at $242 Buy Dec 225 – 265 collar for even money

-Sell to open 1 Dec 270 call at ~$4

-Buy to open 1 Dec 225 put for ~$4

Break-even on Dec expiration:

Profits of the stock up to $265. At or above 265, 100 shares of stock (per 1 call short) would be called-away. If the stock is at or above $265 on Friday, Dec 18th you could always cover the short 265 call to keep the long position intact.

Losses of the stock down to 225 but protected below.

Rationale: collars make sense for long holders who are more worried above extreme near-term volatility to the downside over extreme upside, usually into an event like earnings. This hedge structure allows for the potential of $23 of gains between now and Dec 18th expiration and $18 of losses.

 

Or If I were inclined to play for a near-term consolidation, but a re-test of the prior highs into year-end, after WORK news is digested I might consider a call calendar, selling a weekly out of the money call, and buying a longer-dated call of the same strike, for instance:

Bullish Trade Idea: CRM ($242) Buy Dec – Jan Call Calendar for $3.50

-Sell to open 1 Dec 260 call at $5.50

-Buy to open 1 Jan 260 call for $9

Break-even on Dec 18th expiration:

The ideal scenario is that the stock is very near 260, the short Dec 260 call will be nearly worthless as we get close to Dec 18th expiration but the Jan has gained value picking up deltas allowing for taking a profit, or staying long Jan call and further reducing premium at risk by selling a higher strike call in Jan turning the position into a vertical call spread.

The max risk of this trade idea is $3.50 or ~1.5% of the stock price.

 

Or If I were inclined to play for a pullback I might target the implied move and consider a Put Calendar, using the $220 put strikes in Dec and Jan, Selling 1 Dec 220 put at $3.10 and buying 1 Jan 220 put for $6.30, resulting in a $3.20 debit. The ideal scenario is the stock is near $220 on Dec expiration. The max risk of the trade is $3.20.

 

 

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