Investing Club: Cramer calls Salesforce stock a 'first class debacle,’ but says business solid

Published Wed, Feb 23 20223:24 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

We don't think Salesforce 's (CRM) brutal three-month stock decline of nearly 40% and another 52-week low Wednesday reflects how well the company's business is actually doing. "This is beginning to become a first-class debacle on the stock side," CNBC's Jim Cramer acknowledged during Wednesday's "Morning Meeting" video livestream. This year alone, Salesforce has dropped roughly 24%, significantly underperforming the S & P 500 , which has fallen more than 10% so far in 2022. The enterprise software maker has also been the second-worst performing stock in the Dow Jones Industrial Average — only Home Depot, down 25% year to date, was worse. Despite its stock struggles, the Club continues to hold a favorable view on Salesforce over the long term, attributing the slide to concerns about Federal Reserve interest rate hikes, not its financial results. So, what's happening here? Why has Salesforce seen shares fall so much, even though it's a profitable company that sells valuable products to customers (a Cramer investment mantra in 2022)? 'It's about rates' and the Fed Cramer said investors have largely been bailing on Salesforce because of the Fed, which has adopted a tightening bias to fight the worst inflation in the U.S. economy in decades. The Fed tilted hawkish in the late fall — around the time Salesforce began to struggle. The stock hit a 52-week high on Nov. 9 at $311.75. At session Wednesday's lows, it was down 38% from that peak. Central bankers have not actually increased rates off their near-zero levels yet; that's likely going to take place in March, with expectations for a number of additional hikes throughout the year. However, the Fed has already started tapering its massive Covid-era bond purchases, on pace to finish next month. Cramer said this decline in Salesforce has been reminiscent of what happened to the stock in late 2015 and into 2016, following monetary policy normalization after another crisis. In December 2015, the Fed raised rates for the first time since 2006 . Rates moved had moved steadily lower starting in September 2007, a year before Lehman Brothers collapsed, to near-zero in December 2008, where they stayed through the financial crisis and the Great Depression. "It's about rates. I don't think it's about their business," Cramer said Wednesday, noting Salesforce has seen its multiple come down considerably. Back in November, Salesforce traded at roughly 61 times forward earnings, according to FactSet. That multiple has come down to 40 times, as of Wednesday. Over the past five years, Salesforce has had an average forward price-to-earnings ratio of 57.6, according to FactSet. It's not necessarily surprising to see this multiple, though. Higher interest rates are generally seen as a negative for growth-oriented stocks, many of which are in the technology sector like Salesforce The present valuations of those companies are based on cash flows down the road. However, bigger borrowing costs make those future cash flows look less attractive to investors, so they're less willing to pay up for a stock today. Optimism ahead of earnings Cramer expressed confidence in Salesforce's underlying business, pointing to Tuesday's Deutsche Bank note, previewing the tech giant's upcoming fiscal fourth-quarter earnings report. Here's what the Deutsche Bank analysts had to say ahead of those numbers, which are due out March 1 after the closing bell: Our field checks suggest F4Q business momentum likely exceeded expectations, with healthy transaction volumes punctuated by several $100mn+ deals (TCV). ... Pushback we hear from investors includes weak front-office demand concerns, MuleSoft disruption, lack of conviction on margins, and the risk of F4Q seasonality. We believe better results can very well get CRM back on track given F4Q represents about a third of FY bookings and would therefore be a meaningful proof point to assuage some of the aforementioned concerns. That said, we do believe confidence around margin progression is required for the stock to perform well from here. The analysts also reiterated their buy rating on Salesforce shares and their price target of $300, which represents almost 54% upside from Tuesday's closing price. (Jim Cramer's Charitable Trust is long CRM . See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Signage for the Salesforce West office building in San Francisco, California, U.S., on Tuesday, Feb. 23, 2021.

David Paul Morris | Bloomberg | Getty Images

We don't think Salesforce's (CRM) brutal three-month stock decline of nearly 40% and another 52-week low Wednesday reflects how well the company's business is actually doing.