• The market hated the Slack acquisition

• A dominant position in the cloud

• A long history of digesting companies

 

• The stock has backed off and could be a bargain

• The trend in revenues and earnings supports a rebound

An acquisition can be accretive or dilutive. An accretive purchase adds to value, while dilution subtracts. Meanwhile, the results are in the eyes of the beholder. In Salesforce’s (CRM) case, the market immediately stamped the Slack (WORK) takeover as an adverse event for the purchaser.

Marc Benioff, CRM’s founder, chairman, and CEO built his $207 billion company on the back of strategic acquisitions. The strategy worked like a charm, lifting CRM shares from below $4 per share in 2004 to a high of $284.50 in September 2020. However, the latest purchase trimmed the company’s market cap by over 20%.

While the stock’s action tells us the market believes CRM paid too high a price for WORK, it may have created a rare bargain in the cloud technology sector. CRM blew away fourth-quarter earnings estimates, reporting EPS of $1.74 compared to average forecasts of 75 cents.

The market hated the Slack acquisition

On November 30, 2020, Salesforce (CRM) announced it would acquire Slack Technologies (WORK) for $26.79 in cash and 0.776 shares of Salesforce common stock for each WORK share. The deal reflected a $27.7 billion enterprise value at the time of the announcement. After trading to a high of $284.50 on September 2, and a lower high of $270.92 on November 9, CRM shares hit yet another lower high of $266.10 on November 25 as rumors of a WORK acquisition swirled around the market.

In the aftermath of the announced acquisition, the stock gapped lower.

Source: Barchart

The chart shows the stock gapped down to a low of $215.63 on December 2. After a recovery to $233.18 on December 23, the stock proceeded to fall to a lower low on January 15 at $212.99 and was trading at just below the $226 level at the end of last week. Suffice to say, the price action in the stock, while the overall market continued to rise to new record highs, tells us that the market believes CRM overpaid for WORK and the purchase will be dilutive for the purchaser.

A dominant position in the cloud

Salesforce (CRM) has been an incredible success story since the shares opened for trading in June 2004 at a split-adjusted $3.75 per share. The initial public offering raised $110 million at $11 per share. Since then, the stock has roared higher.

Source: Barchart

The chart highlights the explosive price action in the stock over the past sixteen and one-half years. CRM develops enterprise could computing solutions and concentrates on customer relationship management. The company helps other businesses store data, monitor leads and progress, forecast opportunities via its Service Cloud and various tools and services.

At the $225.77 level on January 22, CRM’s market cap was $207.197 billion. CRM trades an average of over 9.3 million shares each day.

A long history of digesting companies

Strategic acquisitions have fueled CRM’s growth over the past almost two decades. The company has made over sixty acquisitions of competitors or those that complement its business. The WORK deal is the most substantial for CRM, but it has been making billion-dollar purchases for years. In 2019, CRM paid $15.7 billion for Tableau. In 2018, the price tag for MuleSoft was $6.5 million, and CloudCraze cost a cool $3 billion.
The 2016 Demandware purchase was for $2.8 billion. CRM’s Marc Benioff has been aggressive in assembling his company’s building blocks. CRM is now the leader in the relationship management business.

The stock has backed off and could be a bargain

After hitting the high in September 2020, the stock dropped by over 20% as of the end of last week. After the shares hit a low of $115.29 during the risk-off period in March 2020, CRM exploded higher but has underperformed many other leading technology businesses since the early September high and after announcing the WORK acquisition.

Since November 25, when CRM reached $266.10, the stock was 15.2% lower at the $225.77 level on January 22. Over the same period, the tech-heavy NASDAQ moved from 12,094.40 to 13,543.06 or 12% higher. Over the past two months, CRM stock has been digesting Marc Benioff’s latest conquest. The trend in revenues and profits tell us that the stock could be at an attractive level after the recent correction.

The trend in revenues and earnings supports a rebound

Slack’s EPS record is golden over the past four quarters.

Source: Yahoo Finance

The chart shows that CRM beat consensus earnings forecasts over the past four consecutive quarters. In Q3 2020, EPS of $1.74 beat the estimates by 99 cents per share. The consensus for Q4 2020 is at 75 cents, setting the company up for another impressive beat when it reports on February 23.

Source: Yahoo Finance

The trajectory of revenue growth from 2019 through 2020 has been impressive. Earnings grew steadily from 2017 through 2019.

Source: Yahoo Finance

The quarterly trend is equally impressive, with revenues trending higher. The global pandemic made 2020 a challenging year, but CRM continued to prosper, putting the company in a position to purchase Slack.

Betting against Marc Benioff’s company and strategic vision over the past years has been a mistake. In a world where technology leaders have market caps over the $1 trillion level, CRM could be on a path for that target over the coming years.

The bottom line is that even though CRM paid a steep price for WORK, the company’s stock is likely to digest the purchase and resume its upward track. A survey of forty analysts at Yahoo Finance has an average price target of $274.71 for CRM shares, with forecasts ranging from $170 to $320. Most Wall Street companies rate the stock neutral, outperform, or a buy. At below the $226 level, CRM could be a best bet for 2021 and beyond. The WORK purchase could be an opportunity as it temporarily pushed the price of the shares lower.

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CRM shares were trading at $224.50 per share on Monday afternoon, down $1.27 (-0.56%). Year-to-date, CRM has gained 0.89%, versus a 1.96% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles. More...

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