, Inc. (CRM) Stock Remains a Great Investment

Stock of cloud software leader, Inc. (NYSE: CRM) was down 2 percent Wednesday, a day after the company reported solid fiscal third-quarter 2018 numbers but issued guidance for the current quarter that fell short of market expectations.

Salesforce reported third-quarter earnings per share, excluding items, of 39 cents on revenue of $2.68 billion. Both numbers topped consensus analyst estimates of 37 cents and $2.65 billion, respectively.

However, Salesforce guided for fourth-quarter EPS of 32 cents to 33 cents, slightly below consensus expectations of 34 cents. Revenue guidance of $2.80 billion to $2.81 billion narrowly beat expectations of $2.79 billion.

Salesforce also raised its full-year fiscal 2018 revenue guidance to range between $10.43 billion and $10.44 billion. It also reiterated its full-year fiscal 2019 revenue guidance of $12.45 billion to $12.50 billion. (Salesforce’s fiscal 2019 guidance is for the calendar year 2018, but its fiscal 2018 earnings year is for the current calendar year.)

Salesforce’s subscription and support segment reported $2.49 million in revenue in the third quarter compared to analyst estimates of $2.45 billion. The much smaller professional services segment reported just $193.7 million in revenue compared to analyst estimates of $201.4 million.

KeyBanc analyst Brent Bracelin says the market’s negative reaction to guidance shouldn’t be a concern for long-term investors. Even after Wednesday morning’s dip, Salesforce stock remains up more than 56 percent this year.

“Salesforce delivered another solid quarter with upside driven by 25 percent revenue growth and 59 percent EPS growth, in part driven by healthy margin expansion,” Bracelin says. “That said, the biggest surprise was the acceleration in billed and unbilled deferred revenue, rising 31 percent year-over-year to $15.9 billion.”

The 31 percent growth in deferred revenue is the highest growth rate Salesforce has reported in three years. The company is guiding for 19 percent to 20 percent deferred revenue growth in the fourth quarter as well.

BMO Capital Markets analyst Keith Bachman said investors should take Salesforce’s lackluster guidance with a grain of salt. “We think the billings guide may cause some near-term down pressure on the stock, though we believe that management is being conservative on billings guidance,” Bachman says.

Both Credit Suisse and BMO Capital are bullish on Salesforce in the longer term as the company continues to deliver impressive revenue growth and expanding market share in the lucrative cloud software business. BMO has…

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