Greenberg: Pre-Earnings Peek at Salesforce

With reporting financial results this afternoon, several things to consider:

As I wrote here in January, this is a company being valued as a growth stock even though its earnings aren’t growing.

GAAP earnings, that is.

Among things to watch:

  • How earnings comes in versus guidance. I know this seems like a no-brainer, but keep in mind Salesforce has raised revenue guidance each quarter this year. But (and this is important) earnings guidance has been cut and remains below where it started the year. In other words, a beat may not really be a beat.
  • Cash flow. As Ken Hackel of CT Capital pointed out in my original piece, there has been a growing discrepancy between the fast growth in Salesforce’s free cash flow and the more tepid growth in its profits. Normally, this increase in free cash flow would be something to celebrate, but at a subscription-based business like Salesforce, much of that growth is on the back of deferred revenue. In other words, cash comes in the door all at once and is recognized over the course of the subscription. Cash flow is only as good as the rate of growth in subscriptions.

All of this for a momentum stock, which despite the market’s volatility, is off a mere 12 percent from December’s all-time high of around $150.

For perspective, the stock is still more than double a year ago—almost quintuple at the market's post-crash depths of a little more than two years ago, but less than double its post-crash highs.

My take: Lots of moving parts at a company investors love to love. For now.

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