Bearish Bets on Salesforce Amid AI Shift, Eyes on $210-220 Range

Key Takeaway

• Salesforce (CRM) faces bearish outlook with stock predicted to decline towards $210-220 amid slowing growth and high valuation.
• Bearish options trades suggested for Salesforce and Apple, focusing on anticipated declines post-earnings announcements.
• AI stocks, including Nvidia, seen as "overhyped" with potential for profit-taking after reaching new highs and trading at significant premiums.

Salesforce's Stock Trajectory

Salesforce (CRM), once a cloud computing favorite, has seen its stock hit an all-time high earlier this year. However, the momentum has shifted, with investors turning their attention towards companies more directly linked to artificial intelligence (AI). This shift has put Salesforce's stock under pressure, with predictions of a further decline. The stock has experienced a wide trading range between $130 and $310 over the past five years, recently failing to break out to new highs and instead, showing signs of negative momentum. This suggests a potential move towards the midpoint of its historical range, around the $210-220 area. Salesforce's valuation, currently over 28 times forward earnings, is increasingly difficult to justify as growth rates slow. The company's earnings per share (EPS) growth is expected to decelerate to 16%, with revenue growth also slowing to under 10%.

The Options Trade

With Salesforce's earnings announcement on the horizon, options prices have risen slightly. A bearish options strategy has been proposed to capitalize on the anticipated decline. The strategy involves a put vertical spread for the July expiration, buying the $280 puts and selling the $250 puts at a cost of $10.70 per contract. This trade risks $1,070 per contract, with a potential gain of $1,930 per contract if CRM falls below $250 by expiration.

Apple's Post-Earnings Movement

Apple's stock surged following CEO Tim Cook's announcement of the largest stock buyback in market history. Despite this, Apple's revenue saw a 4% year-over-year decrease, with iPhone revenue down by 10%. The post-earnings rally, fueled by the buyback announcement, faces the risk of being short-lived due to the lack of significant innovation and revenue growth. A bearish options trade has been outlined to capitalize on this potential downturn, focusing on a "gap fill" strategy between the $175 and $185 price levels. The trade involves a bear put spread, buying the $485 put and selling the $480 put for a cost of $250, aiming for a 100% return on investment if Apple's stock falls to $480 or below by the expiration date.

AI Stocks and Profit Taking

As AI stocks, including Nvidia, reach new highs, some investors, including billionaire Stanley Druckenmiller, have begun to take profits, citing the stocks as "overhyped" in the short term. A CNBC Pro screen identified several AI-related companies trading at a significant premium to their average forward price-to-earnings (P/E) ratios over the last five years, suggesting they may be vulnerable to profit-taking. Companies such as Super Micro Computer, ARM Holdings, and Micron Technology have seen substantial price increases and trade at significant premiums to their historical valuations. This trend highlights the market's heightened interest in AI technologies but also points to the potential for volatility as expectations adjust.