CRM platform provider salesforce.com, Inc. (CRM) is set to report the third-quarter fiscal 2015 results on Nov 19. Last quarter, the company posted a negative earnings surprise of 400.0%. It is also worth noting that Salesforce has underperformed the Zacks Consensus Estimate in all the four preceding quarters with an average negative earnings surprise of 201.88%.
Let us see how things are shaping up for this announcement.
Factors to Consider
Although Salesforce reported a loss in the last quarter (2Q15), revenues increased year over year primarily due to growth across all its business segments and Salesforce ExactTarget Marketing Cloud platform. Moreover, the company raised the fiscal 2015 guidance.
We remain encouraged by the rising number of deal wins at Salesforce and the rapid adoption of its cloud-based solutions. Overall, the company’s diverse cloud offerings and strong spending on digital marketing remain the strengths. Additionally, the company’s strategic acquisitions and the resultant synergies are expected to remain the long-term positives.
Furthermore, Salesforce is aggressively focusing on expanding its operations across Europe by opening data centers. France, Germany and the U.K. remain on Salesforce’s radar to complete its European expansion by 2015. The opening of these data centers will help Salesforce tap local small and medium businesses as well as government agencies.
While these investments are necessary for long-term growth, margins will remain under pressure over the next few quarters, in our view as increased investment will lead to higher financing costs as well as operating expenses.
Although the company is growing reasonably in the cloud market, growth prospects are tempered by competition from the likes of International Business Machines (IBM), Oracle Corp. and SAP AG. Currency headwinds and an increase in investments could pose additional challenges.
Earnings Whispers?
Our proven model does not conclusively show that Salesforce will beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.
Zacks ESP: ESP for Salesforce is 0.00%. This is because the Most Accurate estimate stands at a loss per share of a penny, in line with the Zacks Consensus Estimate.
Zacks Rank: Salesforce’s Zacks Rank #2 (Buy) when combined with a 0.00% ESP makes surprise predictions difficult.
We caution against stocks with Zacks Ranks #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.
Stocks to Consider
Here are some companies, which you may consider as our model shows that they have the right combination of elements to post an earnings beat this quarter:
Best Buy Co., Inc. (BBY), with an Earnings ESP of +4.17% and a Zacks Rank #1 (Strong Buy).
GameStop Corp. (GME), with an Earnings ESP of +1.61% and a Zacks Rank #3 (Hold).
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