Salesforce.com Warning Traps Complacent Bulls

Cloud-based enterprise software provider Salesforce.com Inc. (CRM) is trading lower by more than 6% in Wednesday’s pre-market session after lowering Q4 2021, Q1 2022, and fiscal year 2023 guidance. The Dow component exceeded Q3 2021 estimates by $0.35 per-share, booking a $1.27 per-share profit, while revenue grew a healthy 26.6% year-over-year to $6.86 billion, meeting expectations. Non-GAAP operating margin posted flat year-over-year growth at 19.8%.

The stock performed well prior to the bearish report, gaining nearly 28% year-to-date. It broke out in early November, clearing resistance at the rally peak posted after the San Francisco-based company was added to the Dow Industrial Average in August 2020, and pulled back to test new support last week. This morning’s high percentage decline signals a failed breakout, raising the potential for even lower prices and a trip into the 200-day moving average in the 250s.

Six Quarters of Strong EPS Growth

The triple profit warning shocked investors who have grown complacent after six straight quarters of higher-than-expected quarterly metrics. It may also signal trouble with the integration of Slack, which Salesforce bought for $27.7 billion in July 2021. This marked the first full quarter that included combined financial results, so the guidance is likely to stoke debate about the acquisition’s wisdom and its impact on growth going forward.

Wall Street analysts were caught flat-footed by the bearish guidance, posting a strong ‘Buy’ consensus based upon 38 ‘Buy’, 3 ‘Overweight’, and 8 ‘Hold’ recommendations. Price targets currently range from a low of $212 to a Street-high $385 while the stock is set to open Wednesday’s session more than $70 below the median $330 target. This weak placement highlights Main Street caution following 257% upside since the March 2020 low.

Wall Street and Technical Outlook

Salesforce.com cleared 2018 resistance in the 160s in May 2020, entering a powerful advance that stalled at 284.50 in September 2020, a few days after the Dow addition. It pulled back more than 80 points into March 2021 and turned higher once again, reaching the prior peak in September. An October breakout ended at an all-time high above 300 on Nov. 9, ahead of a pullback that’s now gapped through new support, signaling a failed breakout and potential long-term double top.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.