Salesforce.com (NYSE:CRM) announced strong earnings on Feb. 25 for fiscal year 2021, including 20% annual revenue growth. But the problem is that going forward, the company projects much lower earnings per share (EPS). In turn, this puts CRM stock on a high price-earnings (P/E) multiple and leaves it with no bargain element.
Last year, EPS on a non-GAAP basis was $4.92 up 64.6% from last year’s $2.99. But going forward, Salesforce forecasts that its EPS will be between just $3.39-$3.41 for FY2022. This reflects a big drop from the EPS mark in FY 2021.
Lower Earnings Prospects
Moreover, in effect, it means that over the two-year period ending Jan. 2022, earnings grow by just over 40 cents from $2.99 from the year ending Jan. 2020. That represents a gain of 14% over two years, or just 6.79% per year for two years, on a compound basis. That is nothing to write home about.
Interestingly, management predicts that its FY 2022 (ending Jan. 22) revenue will jump $4.45 billion from $21.25 billion to $25.7 billion (midpoint). That represents a forecast gain of 20.9% for the coming year. That represents a similar growth rate as this past year with its 20% growth.
Nonetheless, the problem is the company expects to close its Jan. 2021 acquisition of Slack (NYSE:WORK) in Q2. It also expects to close the Dec. 1 definitive agreement to acquire Acumen Solutions. As a result, the costs of these transaction closing plus integration costs will hurt its earnings in 2021. In fact, management indicated on the conference call that the mergers and acquisitions (M&A) activity will cost 63 cents per share.
Moreover, management also said that an increase of travel in the second half of FY2022 as well as real estate consolidation would also hurt their earnings in the year. As a result, EPS will fall another 88 cents for a total drop of $1.51 to between $3.39-$3.41 on a non-GAAP basis.
Keep in mind that Salesforce is paying $27.7 billion in cash for the Slack acquisition. That all-cash transaction will mean the company will have to borrow at least $15 billion, since it has just $11.96 billion in cash and securities at the end of January 2021. This will also cost more on a financing basis.
Overall, the bottom line is this leaves the company on a high forward P/E valuation going forward.
CRM Stock Valuation
At today’s price (March 5) of $210.76 per share, CRM stock has a relatively high 62 times forward P/E multiple. This ratio is found by dividing $210.76 by the company’s forward estimate of $3.40 at the midpoint.
As I have shown, this represents a decline of 30.7% from the $4.92 non-GAAP EPS for this past year ending Jan. 2021. So even though its existing P/E ratio is reasonable at just 42.8 times (i.e., $210.76 divided by 4.92)
The problem is analysts do not forecast Salesforce will exceed its January 2021 earnings of $4.92 for three more years after this upcoming down year. For example, Seeking Alpha has a table showing average analysts’ forecasts for the next 9 years. By the year ending January 2025 EPS will hit $6.34.
So think about that for a minute. EPS was $4.92 in the year Jan. 2021. It will take four years just for EPS to rise $1.42 per share to $6.34 from $4.92. That represents a growth rate of 28.9% over four years. The compound annual growth rate by Jan. 2025 will be just 7.23% per year.
Moreover, Morningstar indicates that historically CRM stock has traded for 64.3 times forward earnings. That makes its present 62 times forward P/E multiple no special bargain.
What To Do With CRM Stock
Clearly CRM stock does not deserve anywhere near its 62 times forward earnings with these paltry earnings growth rates. But somehow management has convinced Wall Street that it is a growth company deserving this high multiple.
They want analysts to believe in a 10-year valuation outlook for the company. And as long as earnings grow as expected, maybe the current valuation can be justified.
The only problem is that there is no real bargain element involved in CRM stock at its present $198 billion market valuation. I expect that the stock will flutter around its present level for a good while as the company grows into its present high valuation.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.