CRM Earnings Preview; How To Play An Overextended Stock

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Salesforce (CRM) has been on fire since its last earnings report when it surprised the market with 27% operating margin guidance for its current fiscal year. The stock is now up ~70% from its December lows heading into its 1Q23 earnings report this afternoon.

CRM is currently trading at 31x their current year EPS guidance of $7.12-$7.14. That EPS guidance is driven by the margin expansion which is a function of cost cutting – not top line growth. CRM is guiding revenue growth to only 10% this year. In other words, CRM might have gotten all the pop – and more – it’s going to from its last earnings report. How to play it?

There’s nothing wrong with holding an overextended stock that you have long term conviction in. But there’s also nothing wrong with trading around a core position. In the latter case, that means taking 1/3 or 1/2 off heading into the earnings report and looking to buy it back into any weakness.

Because NVDA’s massive move has gotten investors so excited, some investors are likely speculating an another big move in CRM. Instead of playing along with them, you could sell them calls and collect the premium in the event that the stock has run too far already. I like selling the CRM $240 June 2 Calls for ~$4.

Note: Selling calls is extremely risky because theoretically there is no limit to how high a stock can go and so your losses are uncapped.

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