Soft outlook and gloomy environment put a question mark on Salesforce valuations
Previously in the series, we discussed Salesforce’s (CRM) share price decline in 2016. Tableau Software’s (DATA) and LinkedIn’s (LNKD) issuance of weaker-than-expected guidance for 2016 caused technology stocks to fall like a ton of bricks in February 2016. In the enterprise software space, where leading technology players are grappling with little to no revenue growth, Salesforce, with its double-digit revenue growth, has enjoyed high valuations. However, there is ample room for improvement in its margins. With CEOs and industry analysts not very hopeful about the business climate in 2016, there is growing skepticism about investing.
Jeffries and CLSA upgraded Salesforce stock
Analyst John DiFucci believes that with Salesforce’s stock decline in 2016, the stock is now fairly valued. Salesforce stock’s rating was upgraded from “underperform” to “hold.” Ed Maguire, an analyst at CLSA, also upgraded Salesforce to “buy.” Maguire stated that the decline in Salesforce stock in 2016 provides “a buying opportunity for the premier pure-play SaaS franchise with substantial scale advantages, a culture of leading-edge innovation and burgeoning [cloud app] platform business poised as the fundamental growth engine for the long term.”
These rating upgrades provided a boost to the company’s stock, which has been falling in much of 2016. The stock has risen ~6% in February.
Investors who want exposure to Salesforce can consider investing in the SPDR S&P 500 ETF (SPY) and the Technology Select Sector SPDR Fund (XLK). SPY and XLK have an exposure of ~29% and 38%, respectively, to the application software sector. SPY and XLK invest ~0.23% and 1.1% of their holdings, respectively, in Salesforce.