Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Earnings Watch: It is all about EBITDA for Salesforce
Peter Garnry
Chief Investment Strategist
Summary: Salesforce is the most important earnings release next week with analysts estimating 10% revenue growth, but for investors the improvements in the EBITDA margin is far important. Activist investors have been aggressive on Salesforce since early this year arguing that Salesforce is too inefficient and is not prioritizing profitability. This has changed and Salesforce is on path to set a new record on its EBITDA margin although there is a long way up to Microsoft's profitability.
Key points in this equity note:
- Salesforce is the most important earnings release next week expected to report revenue growth of 10% and significant jump in operating profit.
- With shares up 55% this year investors have significantly lifted their outlook on the stock and based on earnings results from other software companies we believe that Salesforce can surprise to the upside.
- 12-month forward earnings estimates on the S&P 500 and STOXX 600 indices are still climbing higher suggesting the economy and companies are able to absorb the current interest rate environment.
Salesforce has only one job
The most important earnings release next week is Salesforce reporting FY24 Q2 earnings on Wednesday after the US market close. Analysts expect revenue of $8.5bn up 10% y/y and EBITDA of $3.5bn up from $1.3bn a year ago. Based on revenue figures from other software companies in Q2 it is possible that Salesforce could surprise to the upside on revenue. With the share price up 55% this year investors have become more positive and the chorus of activist investors that were very critical of Salesforce at the beginning of the year has been less loud as profitability has improved.
But for investors the main focus is the operating margin which is still on a path to recover the decline in the EBITDA margin from FY22 Q1 (ending April 2021) to FY23 Q2 (ending 31 July 2022). Peak EBITDA margin was 22.4% and in the previous quarter the 12-month trailing EBITDA margin was 21.1%. Long-term investors in Salesforce will be looking at Microsoft’s EBITDA margin at around 50% as an indication of how good the future can be if Salesforce can remain focused on profitability over growth. Salesforce has only one job in quarters to come and that is to push the EBITDA margin to new record highs.
The stream of earnings is smaller now that the vast majority of companies that follow the normal calendar year have reported earnings. The list below shows the most important earnings releases next week that can impact markets or their industry.
- Monday: Fortescue Metals, HEICO
- Tuesday: PDD Holdings, HP, Hewlett-Packard Enterprise, NIO
- Wednesday: Prudential, Salesforce, Crowdstrike, Pure Storage
- Thursday: UBS, Broadcom, VMware, Lululemon Athletica, Dell Technologies, Dollar General, MongoDB
Earnings estimates are flying higher post Nvidia earnings
Nvidia’s blowout guidance for the current quarter has lifted 12-month forward earnings estimates on the S&P 500 information technology sector beyond 10% year-to-date. As a result earnings estimates on S&P 500 are slowly catching up with the expected European earnings growth. With earnings estimates ticking higher, labour markets remaining tight, and financial conditions the loosest since March 2022 the macroeconomic setup is quite interesting ahead of today’s speeches at the Jackson Hole symposium.
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