Shares in Salesforce.com (NYSE: CRM) opened 4% higher on Wednesday after releasing better than expected 1st quarter financial results and raising full-year guidance. The cloud and CRM software provider’s share price has already rallied nearly 4% on Tuesday in anticipation of the results.

Quarterly revenue was 24.3% higher at $3.74 billion, which was $50 million ahead of analyst forecasts. Adjusted EPS were $0.93, versus the $0.61 consensus estimate. The bottom-line numbers benefited from a mark-to-market adjustment in the value of its strategic investments which added $0.27 a share.

Revenue guidance was raised to between $16.1 and $16.25 billion for the full year and full year EPS are expected to be $2.88 to $2.90.

 

Market Share Continues to Grow

CEO Marc Benioff reported that the company is still gaining market share in the CRM space. MuleSoft, which Salesforce acquired last year, is also gaining market share in the area of application integration.

Sales for the company’s Service Cloud product grew just over $1 billion for the first time. This underlines Salesforce’s strong position as the leading cloud-based CRM platform.

Operating cash flow was also stronger, growing 34%-year on year to $1.97 billion.

 

How Vulnerable is Earnings Growth?

The full-year outlook for earnings of around $2.90 puts the stock on a forward multiple of over 50.

Salesforce is well positioned as the go-to platform to help companies transform their customer relationships for the digital future. Revenue growth also remains as robust as ever and shows no sign of slowing any time soon.

While Salesforce’s top-line growth continues to impress, its profit growth may be vulnerable. The 1st quarter’s earnings numbers benefited from an adjustment in the value of the company’s investments, without which the earnings beat would have been fairly modest. The earnings statement did point out that further gains or losses to the portfolio could be material. In addition, Salesforce has fairly tight margins which it needs to defend to maintain earnings growth momentum.

If there is any sign of a slowdown in earnings growth, investors are likely to question the valuation. Salesforce is not cheap by any measure – the full-year outlook for earnings of around $2.90 puts the stock on a forward multiple of over 50.

Recent price action was also starting to look concerning, and a break of Monday’s low, just above $142, would set up a very ugly technical picture. That now seems less likely.

 

Back into the Trading Range

For now, Salesforce is still a market favourite and analysts are overwhelmingly bullish on the stock — several are already beginning to raise their price targets. The price may be rich, but without a catalyst, it’s unlikely to be questioned until the next set of results are released. So, unless a few large investors decide to exit, or the entire market sells off, it’s very likely the stock will trade in a range between $150 and $170 in the near future. Beyond that, it will depend on the company maintaining earnings momentum and defending its profit margin.