Whether to buy CRM stock often boils down to how an investor views two fundamental trends. One is rising corporate spending on digital transformation projects. And two is Salesforce.com's (CRM) penchant for making big acquisitions, such as its purchase of Slack Technologies, a maker of workplace collaboration software.
XSalesforce 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.
Activist investor Starboard Value on Oct. 18 disclosed that it has taken a stake in CRM stock. Starboard said it aims to help the company improve margins.
At RBC Capital, analyst Rishi Jaluria says Starboard needs to provide specific suggestions.
"Put simply, we do not believe investors are convinced that Salesforce can reach much more than 25% margins without sacrificing the $50 billion revenue target," Jaluria said in a report.
Amid volatility in the Nasdaq, Salesforce stock has retreated 36% this year.
Salesforce Stock: Investor Day
Salesforce hosted an investor day on Sept. 21. As expected, Salesforce gave no preliminary guidance for fiscal 2024 (calendar year 2023).
"While the 25%-plus margin guide for fiscal 2026 was in-line with consensus (not a thesis changer), the reaffirmed $50 billion target (despite a further $2 billion currency headwind) was a modest positive surprise," said a UBS report.
Jefferies analyst Brent Thill said in a report: "Initial guide for fiscal 2026 operating margins is 25%-plus inclusive of M&A, implying 150 basis points of leverage per year that is back-end loaded. S&M and G&A will be the main sources of leverage driving this improvement. While this is impressive, we still believe there is more room for margin improvement over the long-term as CRM still trails its large-cap peers."
One issue for Salesforce stock is how software growth stocks are doing generally.
A closely watched software benchmark, the iShares Expanded Tech-Software ETF (IGV), is down nearly 36% in 2022. The software index retreated over 11% in September. Meanwhile, the S&P 500 is down 21.7% this year.
Salesforce stock reported July-quarter earnings that fell from a year earlier but topped Wall Street targets. The company lowered its fiscal 2023 revenue outlook for CRM stock while announcing its first-ever repurchase program.
CRM Stock: New President Appointed
The enterprise software maker said its board of directors has approved a $10 billion buyback for CRM stock.
But Salesforce stock lowered its 2023 revenue outlook to a range of $30.9 billion to $31 billion from earlier guidance of $31.7 billion to $31.8 billion.
October-quarter guidance for current remaining performance obligations, known as CRPO bookings, missed views.
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, will switch to chief strategy officer.
"Given the timing, it could signal a tougher operating environment that requires some go-to-market changes," Cowen analyst Derrick Wood said in a note to clients.
The enterprise software maker has dropped the ".com" from its legal name. The name change from Salesforce.com to Salesforce Inc. took effect April 4. The company continues to trade as CRM stock.
In addition, Salesforce has slowed hiring as it looks to curb expenses.
Salesforce Stock: Co-CEO Structure Returns
Salesforce promoted Bret Taylor to act as co-chief executive alongside current CEO Marc Benioff late last year. Taylor had served as Salesforce's president and chief operating officer since 2019. Before that, he was chief product officer. Twitter (TWTR) named Taylor its new chairman on Nov. 29.
Salesforce had a co-CEO structure earlier. But Keith Block, viewed as a possible successor to Benioff, stepped down as co-CEO in early 2020.
Amid the coronavirus pandemic, demand for next-generation collaboration and productivity tools has increased. In addition, many companies aim to automate operations and track key business metrics in order to support employees working from home.
One view is that spending on digital transformation projects will continue to be strong as the Covid-19 emergency eases. Such projects turn paperwork into electronic records and automate business workflows. More companies are investing in business analytics/artificial intelligence tools that scrub customer data.
In addition, CRM stock could get a lift from U.S. federal information technology spending. The company recently unveiled "no-code" programming tools for the public sector.
Further, Salesforce has stepped up investments in low code app development.
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 Joins Dow Jones Industrial Average
CRM stock in 2020 was added to the Dow Jones Industrial Average. Further, it replaced Exxon Mobil (XOM) in the 30-stock benchmark.
Meanwhile, CRM stock recently was added to the IBD Long Term Leaders list.
Also, 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 maker.
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: Core Business Strength An Issue
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 Oracle (ORCL). 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 also have been a headwind to margin growth.
Salesforce Stock: Fundamental Analysis
Including Slack Technologies, Salesforce earnings for the second quarter fell 19% to $1.19 on an adjusted basis. The San Francisco-based enterprise software maker said revenue climbed 22% to $7.72 billion.
A year earlier, Salesforce reported profit of $1.48 a share, including investment gains, on sales of $6.34 billion.
CRM stock analysts expected Salesforce to report earnings of $1.03 a share on sales of $7.69 billion.
Current remaining performance obligations, known as CRPO bookings, rose 15% to $21.5 billion, in line with estimates. CRPO bookings are an aggregate of deferred revenue and order backlog.
For the current quarter ending in October, the company forecast earnings per share in a range of $1.20 to 1.21 vs. estimates of $1.28 a share for CRM stock.
Also, the software maker expects revenue of $7.825 billion at the midpoint of guidance, vs. estimates of $8.07 billion.
Salesforce projected third quarter CRPO growth of 12% vs. estimates of 16% growth.
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 are 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.
On its first quarter earnings call, Salesforce said its customers were generating more than 164 billion Einstein predictions per day, up from 100 billion a year earlier. But Salesforce has yet to disclose financial metrics on how much revenue the Einstein AI platform generates, directly or indirectly.
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: Recent Acquisitions
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.
Furthermore, 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 U.S.-China trade tensions, Salesforce has added Alibaba Group (BABA) as a sales channel partner in China.
Is Salesforce Stock A Buy?
In cloud computing, Salesforce has partnered with Google for data analytics. In addition, Salesforce has expanded its venture capital investing.
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.
According to IBD Stock Checkup, CRM stock currently has a Relative Strength Rating of 33 out of a best-possible 99. The best stocks tend to have ratings of 80 and above.
CRM stock holds an IBD Composite Rating of 60 out of a best possible 99.
IBD's Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.
In addition, 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 Oct. 22, CRM stock holds no valid entry point. Salesforce stock needs to form a new base to be actionable.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on artificial intelligence, cybersecurity and 5G wireless.
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