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Salesforce.com: Next Momentum Stock to Fall
by Jamie Dlugosch
It's rough being a momentum investor these days.
Although the market is in full rally mode after the latest brush with a correction, momentum stocks have been getting crushed.
The most recent redwood to fall is Facebook (NYSE: FB). The social networking stock took a 6% hit after it released earnings. What must be troubling for investors in Facebook is that the company beat expectations.
This is not the reaction one would expect.
While the stock market is often irrational, the wonder of it all is that markets eventually correct.
Thus high-valuation stocks like Facebook eventually come back to earth.
Other momentum names that have taken a big hit lately include Amazon.com (NASDAQ: AMZN), Twitter (NASDAQ: TWTR) and SodaStream (NASDAQ: SODA).
What momentum name will fall next?
My bet is on Salesforce.com (NYSE: CRM).
The cloud-computing wonder child is defying gravity. Its shares trade for a rich valuation and its operating performance is mostly as expected and nothing to get excited about.
What's holding the stock higher in the stratosphere?
It's all about the story. Simply say the word "cloud" and investors get all giddy.
It reminds me of the dot-com boom when simply having a name with dot-com in the ticker would attract investors in droves.
Wait ... Salesforce is not just Salesforce. It is Salesforce.com!
Oh no, history is repeating itself. How the market has yet to figure it out is beyond me.
Apparently Salesforce gets a free pass from those looking to learn the lessons of the past.
Morgan Stanley loves the stock. On Tuesday, the Wall Street firm reiterated its Overweight rating on Salesforce, lifting its target for the stock to $80 per share from $79 per share.
Was that extra dollar per share worth the trouble?
Seriously, how do you take a momentum stock with a premium valuation -- already -- and raise the target by a dollar per share?
It's all rather arbitrary anyway when it comes to valuing momentum stocks.
What is more important is that Morgan is reiterating the rating on the stock in advance of the company's release of earnings results in mid-November.
That's a daring move as most of the momentum stocks in the market are getting hit hard after releasing results -- good or bad.
With respect to Salesforce, the story is getting some juice from the company's announcement of a big health-care initiative.
On Monday, Salesforce said it hopes to bring in a billion dollars in additional sales by servicing the health-care market. That would represent about a fifth of current sales.
Good luck with that, but I wouldn't count on it in advance.
Many other companies are competing for the same business, including Microsoft (NASDAQ: MSFT). In fact, Microsoft might just become a bigger burr in the saddle for Salesforce.
Microsoft is making a determined effort to win more cloud business. If it is successful, it would be to the detriment of Salesforce.
It is admirable that Salesforce is trying to expand to new markets, but it is in a bit of a no-win situation, all related to a high valuation.
Therein is the trouble with momentum. It takes a great deal for the story to continue to expand; at the first sign of trouble the bubble can burst in a big way.
Given the current pricking of bubbles elsewhere, I would be very cautious with respect to Salesforce today.
Jamie Dlugosch Editor Investor Research Institute
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