Whether to buy CRM stock now depends on investor confidence in the “new” Salesforce (CRM) — a big cap software maker focused on improving profit margins rather than sales growth.
Salesforce reported first-quarter earnings and revenue that topped analyst estimates as operating margins improved amid cost-cutting spurred by activist investors. But for the current July quarter, Salesforce said it expects revenue of $8.52 billion, edging by estimates of $8.49 billion.
“The magnitude of revenue outperformance was below historical trends and guidance for Q2 CRPO (current remaining performance obligations), to grow +10% year-over-year was 1% below expectations,” Goldman Sachs analyst Kash Rangan said in a note to clients .
Further, CRPO bookings are an aggregate of deferred revenue and order backlog.
On the earnings call with analysts, management discussed the boom in generative artificial intelligence. Salesforce is one of many AI stocks to watch.
Salesforce stock has gained 62% in 2023. CRM stock has outperformed the Nasdaq composite and the iShares Expanded Tech-Software ETF (IGV). The Nasdaq has gained 27% in 2023. The software ETF is up 29%.
Salesforce Stock: Profitability Versus Sales Growth
Meanwhile, activist investors with stakes in Salesforce include Elliott Management, Starboard Value, Third Point, ValueAct Capital and Inclusive Capital.
Salesforce in January said it would cut 10% of its workforce and reduce office space as part of a restructuring plan amid expectations that revenue growth will slow in fiscal 2024. More job cuts could be coming, some analysts speculate.
Salesforce in early 2023 compared a panel that explores mergers and acquisitions, implying it will make no more big acquisitions.
Further, rising corporate spending on digital transformation projects remains a plus for Salesforce stock.
Salesforce sells software under a subscription model. Its software helps businesses organize and handle sales operations and customer relationships. The company has expanded into marketing, e-commerce and data analytics.
CRM Stock: Co-CEO Structure Falters
Salesforce co-Chief Executive Bret Taylor recently departed amid other management changes. Taylor had been co-CEO for about one year. Meanwhile, Marc Benioff remains the sole CEO of the company.
Taylor’s departure is the latest management shift for CRM stock. Salesforce on Aug. 8 announced the appointment of Brian Millham as president and chief operating officer. Gavin Patterson, who had been president and chief revenue officer, was shifted to chief strategy officer. Patterson left the company in early November. In addition, Stewart Butterfield, who headed the company’s Slack unit, will leave Salesforce.
Salesforce tried using a co-CEO structure once before. But Keith Block, viewed as a possible successor to Benioff, stepped down as co-CEO in early 2020.
One question for investors involving international revenue growth. Will Salesforce be able to make the investments needed to drive international growth amid pressure to improve profit margins?
Salesforce Stock: Digital Transformation
During the coronavirus pandemic, the demand for next-generation collaboration and productivity tools increased. In addition, many companies aim to automate operations and track key business metrics in order to support employees working from home.
Digital transformation projects turn paperwork into electronic records and automate business workflows. More companies are investing in business analytics and artificial intelligence tools that scrub customer data.
In addition, CRM stock could get a lift from US federal information technology spending. The company provides “no-code” programming tools for the public sector.
At an investor day in December 2020, Salesforce said it aims to double revenue to $50 billion by 2026, including a $4 billion contribution from Slack. At the same time, Salesforce stock lowered its organic revenue growth target to 19% from 20% over the next four years.
Salesforce Stock: Raising The Bar On Buyouts
The bar keeps rising when investors look at Salesforce’s “biggest acquisition ever.”
Its purchase of Exact Target in 2013 was followed by e-commerce platform Demandware in 2016, and MuleSoft in 2018. Last year, Salesforce ponied up $15.7 billion in an all-stock deal to buy data analytics firm Tableau Software.
Then came the Slack deal, which closed in July. Amid growing competition with Microsoft (MSFT), Salesforce agreed to pay $27.7 billion for workplace collaboration software makers.
The upbeat view is that acquisitions have enabled Salesforce to expand from its roots in customer relationship management software into marketing, e-commerce and other markets.
Salesforce is one of many big-cap tech stocks to watch. Started in 1999, Salesforce went public in 2004. Benioff, who is also Salesforce’s founder, worked at Oracle for 13 years before he left to start the software company.
CRM stock in 2020 was added to the Dow Jones Industrial Average. Further, it is replaced Exxon Mobil (XOM) in the 30-stock benchmark. Meanwhile, CRM stock belongs to the IBD Long-Term Leaders list.
CRM Stock: The Threat From Rivals
Salesforce faces some formidable competition. Microsoft’s Dynamics has gained traction as a lower-priced alternative to Salesforce tools, some analysts say. In addition, Microsoft is putting more salespeople behind the Dynamics business.
Also, Salesforce has been a fierce rival of Oracles (ORCL). And competition with Adobe Systems (ADBE), the digital media and marketing software firm, has been rising.
Newer rivals include Zendesk (ZEN) and HubSpot (HUBS). And Twilio (TWLO) has jumped into customer relationship management software with an acquisition.
The customers of software-as-a-service, or SaaS, companies like Salesforce purchase renewable subscriptions, rather than one-time software licenses. Customers receive automatic software updates via the web.
Also, the company spends about 14% of revenue on research and development, relatively high for a software company. Increased hiring and wage inflation for software engineers have also been a headwind to margin growth.
Salesforce Stock: Fundamental Analysis
For the quarter ended April 30, Salesforce earnings rose 72% to $1.69 per share on an adjusted basis. Revenue increased 11% to $8.25 billion.
Analysts expected Salesforce to report earnings of $1.61 a share on sales of $8.18 billion.
In addition, the April quarter operating margin was 27.6%, with restructuring boosting margins by nearly 9%, the company said.
“Acquired assets continue to show choppy-top-line growth,” said Goldman analyst Rangan. MuleSoft grew 26% as execution improves, though we note that this is off an easier comp and is still below Q4’s 33% growth. Tableau grew 12% vs. 7% in Q4, showing modest improvement. Slack posted 20% growth, showing deceleration vs. 33% Q4.”
Salesforce Builds Artificial Intelligence Platform
One technology that Salesforce hopes will drive more revenue is artificial intelligence. The enterprise software maker introduced its “Einstein” AI software cloud platform in September 2016. The first Einstein AI software tools helped salespeople predict which deals were most likely to close based on a company’s historical lead and account data.
In addition, Salesforce has integrated AI tools into other enterprise software offerings over the past three years, targeting industries such as financial services in digital transformation. Einstein AI primarily works via chat bots.
But Salesforce has yet to disclose financial metrics on how much revenue the Einstein AI platform generates, directly or indirectly.
Meanwhile, Salesforce in 2019 agreed to buy data analytics firm Tableau for $15.7 billion in an all-stock deal. Tableau provides data visualization software. In addition, it enables customers to build databases, graphs and maps using time series analytics, a technique that analyzes a series of data points ordered in time.
Also, Salesforce expects synergy between its Einstein artificial intelligence tools and Tableau’s business intelligence software. In 2021, Salesforce announced that it would rebrand Einstein Analytics as Tableau CRM.
CRM Stock: Acquisition Spree
In 2018, Salesforce bought MuleSoft for $6.5 billion in cash and stock. MuleSoft’s software automates the integration of new tools with legacy enterprise platforms and speeds application development. MuleSoft’s business hit a bump in late 2021.
Meanwhile, Salesforce spent $4.6 billion on acquisitions in 2016. They included e-commerce platform Demandware.
E-commerce has boomed amid the coronavirus pandemic. The shift to online shopping has provided a lift to Salesforce’s “Commerce Cloud,” which has its roots in the Demandware purchase.
Further, Salesforce’s $2.5 billion purchase of Exact Target in 2013 jump-started its move into marketing software.
Bullish analysts say Salesforce AI’s tools, plus Tableau and MuleSoft will make a powerful combination for digital transformation projects.
Further, Salesforce aims to partner with IT services firms such as Accenture (ACN) to add customers. Despite US-China trade tensions, Salesforce has added Alibaba Group (BABA) as a sales channel partner in China.
In cloud computing, Salesforce has partnered with Google for data analytics. In addition, Salesforce has expanded its venture capital investing.
Is Salesforce Stock A Buy?
After forming a long cup base from September 2020 to September 2021, Salesforce stock hit an all-time high of 311.75 on Nov. 9, 2021. The stock pulled back in late 2021 as the software sector weakened. Then CRM stock retreated nearly 48% in 2022.
According to IBD Stock Checkup, CRM stock currently has a Relative Strength Rating of 93 out of a best-possible 99. The best stocks tend to have ratings of 80 and above.
Further, CRM stock holds an IBD Composite Rating of 98 out of a best possible 99.
IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. Also, the best growth stocks have a Composite Rating of 90 or better.
CRM stock has an Accumulation/Distribution Rating of B-minus. The rating analyzes price and volume changes in a stock over the past 13 weeks of trading. The rating, on an A+ to E scale, measures institutional buying and selling in a stock. A+ signifies heavy institutional buying; E means heavy selling. Think of the C grade as neutral.
As of June 12, Salesforce stock holds an entry point of 178.94. In addition, CRM stock is extended above a 5% buy zone.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
YOU MAY ALSO LIKE:
IBD Digital: Unlock IBD’s Premium Stock Lists, Tools And Analysis Today
Learn How To Time The Market With IBD’s ETF Market Strategy
How To Use The 10-Week Moving Average For Buying And Selling
Get Free IBD Newsletters: Market Prep | Tech Report | How To Invest