Salesforce (CRM) shares started the day on a strong note as the stock is trading more than 10% higher in pre-market activity on Wednesday.
By the looks of the jump in price, investors would think that Salesforce knocked the cover off the ball with its earnings report released last night.
That’s not the case though as the company missed its earnings per share target and slightly beat its revenue target for the quarter.
Looking at the data, Salesforce.com earned $2.41 per share, -$0.03 less than what analysts expected from the company.
Revenue for the quarter came in at $9.44 billion, slightly higher than the $9.35 billion that Wall Street thought the company would do in sales for the quarter. That revenue accounts for growth in sales of 8.3% compared to last year’s results.
To say that the results were impressive would be an overstatement, but investors love the results to the tune of a 10% increase in the company’s market cap this morning.
Here’s why….
Salesforce had a rough first half of 2024.
Like so many other AI Service companies, Salesforce saw a slowdown in customers signing new contracts. The reason was simple, companies didn’t want to commit to new services from the company as many CEOs and CFOs were preparing for a recession.
Interest rates were high, consumer confidence was low and most of Wall Street’s analysts were calling for a recession in late 2024 and early 2025 as they determined that the Fed wouldn’t be able to pull off the “soft landing” scenario.
Six months later, the soft landing is in-play and companies are starting to look to 2025 as another year of modest growth for the economy.
Salesforce CEO Marc Benioff played his cards well.
Salesforce.com has been in the thick of rolling out its Agentforce chatbot. The Ai-powered feature of Salesforce’s CRM systems is expected to leverage AI as a revenue booster, but it was too early to hang the company’s revenue and earnings forecasts on its success, especially if clients weren’t signing contracts.
As a result, Benioff spent two quarters lowering investors’ outlook for revenue and earnings. The move cut 33% of Salesforce’s market cap as the stock price dropped from $315 to $215, but it set the tone for the rally that kicked off after the company’s earnings report in October.
In October, the company issued inline guidance for last night’s report, maintaining low expectations, which is exactly what was delivered.
Positive Comments on Agentforce last night have investors refocusing on growth. The company is now able to start leveraging its pipeline of AI-powered tools while customers are starting to make commitments and sign contracts.
This underscores a simple rule that investors should all be aware of…
“Stocks go higher based on speculation, not necessarily fundamentals.”
Investors now have reason to speculate that the next quarter and the quarters after that will continue to improve based on management’s handling of expectations. As a result, shares prices will move higher on that speculation, even if the fundamentals – like last night’s earnings results – don’t immediately confirm that investor’s speculation is right.
Historically, these situations are the most bullish backdrop for a stock to drive prices higher.
IBM (IBM) and ServiceNow (NOW) are two other companies in the AI Service sector that have maintained subdued earnings forecasts.
In both cases, the companies are in the process of increasing their use of AI-powered services to help their customers become more efficient and profitable.
Like Salesforce.com, IBM recently increased their 2025 earnings forecast after a few quarters of maintaining lower expectations. The lowered expectations saw a 15% drop in IBM share price which has been revered as IBM moves back to its all-time highs again.
Today’s spike higher sparks what is known as a “Volatility Rally” as the stock has broken above its top Bollinger Band.
Historically, Volatility Rallies like this will fuel a fast and aggressive move higher over a two-week period. From there, investors should expect shares of Salesforce to endure a short-term “dip” as some short-term profit-taking is likely to happen. That dip will provide investors an opportunity to grab shares at prices lower than their current all-time highs, likely at $350..
From a longer-term perspective, Salesforce.com maintains a bullish outlook with a target price of $500.
