Is It Too Late To Buy Salesforce Stock?

The substantial cost-savings and improved efficiency that cloud computing offers have driven rapid adoption of the technology. That accelerated growth over the past few years has also fueled stock gains for the major cloud players. Microsoft shares, for instance, are up 55% this year, in large part due to its Azure cloud platform.

Salesforce (NYSE: CRM) has done even better, with the stock up nearly 86% year-to-date. The eye-popping increase has many investors wondering if the boom has come and gone.

Looking back, there’s hope for more gains. After all, Salesforce shares were trading over $300 per share in late 2021, and most of this year’s growth has been a recovery from the tech sell-off of 2022.

While the company’s latest earnings didn’t exactly smash analysts’ estimates, revenue still showed marked growth from last year. That’s been a point of concern for Salesforce, as the company’s sales and service segments have seen gradual revenue declines over the past year or so. Overall subscription and support revenue is down from 18% last year to 12% in the 3rd quarter.

The good news is that revenue held steady from last quarter, bolstered by solid sales from the company’s cloud platform (which includes Slack) and consistent growth in its data arm.

The latter segment includes the popular Tableau and Mulesoft platforms. The end of the revenue decline was met with investors’ approval, and the stock went up around 9% after the earnings call.

So, is it too late to buy Salesforce stock?

Why Did Salesforce Stock Rise?

CRM share price has no doubt been impressive in 2023 have largely recovered from the 2022 sell-off. CRM dropped that year due to concerns around the broader economic picture. The thought process being that companies were tightening their belts, and that cost-cutting would do damage to Salesforce’s bottom line.

And while sales did slow down, the company hasn’t been affected to the extent that investors initially expected. In the third quarter of 2023, revenue of $8.72 billion represented a 11% year-over-year increase. That was nearly even with what analysts had forecast. Salesforce surpassed estimates for earnings-per-share by 2.5%, with a GAAP diluted EPS of $1.25.

Another driver for CRM’s gains is the company’s slightly increased guidance for the fourth quarter and for the fiscal year. Salesforce now expects 10% growth in the 4th quarter and 11% sales growth for the year. Even though those numbers aren’t as high as years past, it was enough to keep CRM investors engaged and buying.

Will Salesforce Stock Keep Going Up?

The question now is how long will that engagement continue, especially when there are hotter cloud stocks on the market?

Hubspot, which makes Customer Resource Management (CRM) software that competes with Salesforce, saw 26% growth in the 3rd quarter. That same growth was echoed by Microsoft’s CRM segment, by almost an identical amount.

Decelerating revenue caused Salesforce to take a hard look at its margins, and the company undertook a massive restructuring to optimize its operations. That translated to layoffs and management reported an 11% decrease in staff in the 3rd quarter.

It also meant reducing marketing costs. A part of that initiative included putting Salesforce products on Amazon Web Services’ sales platform. The goal was to make it much easier for customers to access and purchase the company’s products. Salesforce also held off on big acquisitions that might increase its ecosystem but would cost too much in the short-term.

So far, the company’s restructuring efforts appear to have been successful. GAAP operating margin stands at 17.2%. Concerns that all of the cost-cutting might cut into the company’s revenue have been mitigated for the moment by Salesforce’s consistent revenue flow.

What Do Analysts Say About Salesforce Stock?

It may come as no surprise, then, that after an 86% increase, analysts generally believe that the big gains are not over. 32 out of 49 analysts rate CRM as a Buy at this point. And 3 of those analysts consider the stock still has room to outperform the market.

The highest estimate forecasts CRM will jump by nearly 46% over the next year to $369. The consensus, however, is a much more modest gain of 11% over the next 12 months to fair value of $271 per share.

There are 16 Hold ratings and a single analyst who advises investors to sell CRM. That analyst sees the stock dropping substantially, falling by over 37% to $159 in the next year.

Is It Too Late To Buy Salesforce Stock?

According to analysts consensus, it is not too late to buy Salesforce stock because its price target of $271 is 11% higher.

The stock is trading around 7.1x last twelve months sales versus the peer average of 7.7x, further suggesting upside potential close to 10%.

The fact that Salesforce shares were above $300 less than a couple of years ago is another feather in CRM’s hat. The selloff, though, was largely due to economic factors, and the company has been able to stem the decrease in revenue and increase its margins.

Is Salesforce Stock a Buy or Sell?

Salesforce is now the 3rd largest enterprise software provider (by revenue), and the number one enterprise applications platform. But there is another factor that Salesforce hopes to leverage for future growth, artificial intelligence. It is broadly considered now as the leading AI CRM platform.

Salesforce hopes to combine the strength of all of its segments (CRM, AI, and data) to create a platform that will drive the company’s future. While that may happen, it’s hard to see the stock continuing its pace of growth, at least in the near future.

There is also the possibility that all of the cost-cutting and reduced marketing expenses will hurt R&D innovation and allow Microsoft gain a greater foothold in market share. With all that said, long-term investors who believe in the company’s platform should take a strong look at Salesforce.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.