Salesforce Q2 Earnings Preview

The renewed focus on operations and cost controls might be a sign Salesforce is looking to bend the bottom line to match top-line growth.
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The shake-up

Over the last quarter, Salesforce has taken several actions showing that it is serious about addressing costs. Slowing hiring is the most obvious. But promoting a co-CEO and making the COO the President shows a commitment to streamlining.

While the stock price has , top and bottom line results have been going in opposite directions. A trend that is expected to continue when the company reports earnings, with from last year to $1.03, but revenues are expected to be up 21% to $7.7B.

Salesforce benefitted from the move online during the pandemic as companies needed more help managing new customer relations. Even with the fear of recession, CRM could stand out as a potential way for companies to cut costs through automation. In fact, after last quarter's earnings, the CEO stated that he'd not seen any impact on demand. Generally, traders are interested in the outlook of companies, but investors might be extra keen on Salesforce’s guidance and insight into the broader economy.

Where the focus lies

One of the drivers for Salesforce's growth has been acquisitions, and commentary from the new co-CEO that M&A might be sidelined for a bit could make investors a little shaky. On the other hand, the most recent acquisition, Slack, has afforded the company a chance to raise prices.

With sales rising, a note of concern appeared in last quarter's earnings when operating margins fell by 260bps. The challenge is transforming good sales numbers into good profitability numbers, which would be necessary to turn the stock price around.

Salesforce at 50-day SMA

Salesforce stock price has halted at the 50-day average of $177 after forming a downward runaway gap. Although $183 could be filled in the short-term, only breaking above the double top at $190 would encourage bulls to attempt the $200 round level. Above there, the 200-day average of $220, coupled with the March top, would be major resistance.

In the event the SMA support is breached, bears would eye the bottom of the ascending channel above $160, and $160 itself. It is the highest activity level before the May low of $155.

Key takeaways

Salesforce has taken actions to address rising costs but its stock has underperformed the market. Regardless, Salesforce benefited from the move online during the pandemic and investors will be interested in their guidance and insight into the broader economy.

Salesforce has been making acquisitions to grow their company, but a note of concern appeared in last quarter's earnings when operating margins fell by 260bps. Of note, is the new co-CEO’s comments about halting M&A, which will likely have a deteriorating impact on the stock’s price if confirmed.