We’re cutting our price target on Salesforce after disappointing guidance
Salesforce shares sank more than 16% Wednesday after reporting mixed earnings and revised guidance lower. The cloud software company is a high-quality stock in a rough neighborhood — at least for the near term. Revenue increased 11% year over year to $9.13 billion in the three months ended April 30, missing the $9.18 billion expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share of $2.44 rose 44% on an annual basis and topped the $2.38 predicted by analysts, LSEG data showed. Adjusted operating margin expanded to 32.1% in the quarter, but missed the consensus estimate of 32.3%, according to FactSet. On a GAAP basis, the quarterly operating margin came in at 18.7%, below the expected 19.3%. Salesforce Why we own it : Salesforce is a leading enterprise software tool for companies across all industries, helping employees to better communicate with colleagues internally and with their customers. The company’s balance of margin expansion with the potential for faster top-line growth should lead to strong earnings growth. Competitors : SAP , Microsoft , HubSpot Most recent buy : Dec. 21, 2022 Initiation : June 15, 2018 Bottom line This wasn’t the quarter we were hoping for. Salesforce increased its adjusted earnings forecast for the full year, but its lowered sales growth outlook has investors on edge. Is this a sign Salesforce is maturing and can no longer be valued as a growth company? Or is this just a temporary slowdown? Are customers concentrating their budgets on artificial intelligence investments with Nvidia and the hyperscalers ( Amazon , Microsoft , Alphabet ) and cybersecurity following several recent high-profile attacks? That could make for choppiness in the shorter term as the higher for longer rate environment will force enterprise customers to remain hyper-focused on keeping costs down and pushing out all but the most crucial of investment priorities. The good news: Salesforce’s low revenue attrition rate speaks to the crucial nature of its offerings to its customers. That bodes well for the company as corporate budgets come back. In the meantime, we like what we see on the cash flow front, especially given management’s intensified focus on shareholder returns via dividends and buybacks. The data cloud business continues to outpace expectations, driven by accelerated growth at both MuleSoft and Tableau. Growth at Slack, which is housed in Platform and Other, also accelerated sequentially. While these positives are offset by disappointing profit margin results, we are more focused on the directionality of profitability and take comfort in that, estimates aside, we did see healthy expansion on a year-over-year basis, especially on a GAAP basis. The CRM sell-off in the after market Wednesday may be overdone, but we also understand stocks aren’t rewarded when growth is slowing. Salesforce isn’t alone. Workday is down nearly 19% since reporting earnings on May 23. We do expect growth will ultimately reaccelerate, but the timing is uncertain. We must therefore proceed with caution and be patient. We aren’t ruling out picking up more shares, especially if we see signs of deal activity improving. At 23.5 times management’s FY2025 guidance (based on the after-hours share price), CRM is now trading at the lower end of its range over the past two years. We reiterate our 2 rating on Salesforce but will reduce our price target to $300, from $340, in acknowledgment that the upside will be limited in the near term. Quarterly results On the post-earnings call with investors, chief operating officer Brian Millham said the buying environment remains “measured,” resulting in “elongated deal cycles, deal compression and high levels of budget scrutiny.” This is a theme we’ve seen for the past couple years. There are pockets of strength, including data cloud, as even budget-conscious companies look for ways to leverage artificial intelligence to improve efficiencies. Non-GAAP operating margin benefited from the lower cost of revenues, sales and marketing, and general and administrative expenses. CEO Marc Benioff said the company’s data cloud business was included in 25% of its $1-million-plus deals during the quarter. The company added 1,000 data cloud customers for the second consecutive quarter. Six of the company’s top 10 deals in the quarter included six or more clouds (reported as the 5 units noted in the table above). Salesforce’s revenue attrition rate was roughly in line with recent quarters at about 8%. As we’ve noted in the past, the relatively low attrition rate is a sign that while customers may be scrutinizing budgets more closely, they are hesitant to drop Salesforce’s software and are willing to pay higher prices as their deals come up for renewal. Breaking down the table above one step further, MuleSoft (Integration) was up 27% year over year in constant currency, while Tableau (Analytics) was up 21%. Slack, which is a part of “Platform and Other” and has minimal currency exposure, was up 17%. All three results represent an acceleration in growth rates on a sequential basis. Cash flow was clearly a bright spot during the quarter. Management returned nearly $2.2 billion to shareholders via buybacks and another $388 million via dividends. As of the end of the quarter, Salesforce still had a little more than $16 billion available to deploy into share repurchases under the current authorization. Guidance For its 2025 fiscal year, Salesforce reiterated total revenue guidance of $37.7 billion to $38 billion, an 8% to 9% increase over the previous year and a slight miss versus analysts’ consensus expectation of $38.05 billion, according to FactSet. Management reduced its revenue growth forecast for the subscription and support business to slightly below 10% over last year. That’s down from the prior estimate of 10%, and below the Street’s 10.3%. On a constant currency basis, sales growth is now expected to hit roughly 10%, down from the prior estimate of slightly above 10%. The expected operating margin for the fiscal year on a GAAP basis was also revised lower: Management is now targeting 19.9%, vs. the prior target of 20.4%. However, the revision is in line with Street estimates. The adjusted operating margin target of 32.5% was reaffirmed and is in line with expectations. GAAP diluted earnings of $6.04 to $6.12 per share are now expected, down from $6.07 to $6.15 per share previously. However, Salesforce said adjusted earnings should hit $9.86 to $9.94 per share, up from the prior range of $9.68 to $9.76 per share, and ahead of the $9.80 per share Street estimate. For the second quarter, Salesforce estimates revenues of $9.2 to $9.25 billion, below the $9.345 billion estimate. Adjusted earnings guidance of $2.34 to $2.36 is also below the $2.40 consensus estimate, according to FactSet. Salesforce’s current remaining performance obligation is expected to grow 9% year over year in the second quarter, which is in line with expectations. That metric represents future revenue under contract that will be booked over the next 12 months. (Jim Cramer’s Charitable Trust is long CRM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Signage on a Saleforce office building in San Francisco, California, U.S., on Tuesday, Feb. 23, 2021.
David Paul Morris | Bloomberg | Getty Images
Salesforce shares sank more than 16% Wednesday after reporting mixed earnings and revised guidance lower. The cloud software company is a high-quality stock in a rough neighborhood — at least for the near term.
