Will Salesforce Stock Recover? Customer relationship management software giant Salesforce (NYSE:CRM) is among the tech stocks that have seen sharp selloffs in 2022.
Widely known as the go-to solution for CRM software, Salesforce is now facing a variety of headwinds that have made investors more bearish on the stock.
Why Did Salesforce Sell Off
YTD, Salesforce has lost about 50 percent of its value. This comes despite earnings performance that hasn’t been as lackluster as much of the rest of the tech sector.
One of the core reasons for this is investor perception that Salesforce is losing its economic moat. Once the undisputed leader in the CRM software world, Salesforce has seen lower customer satisfaction rates and more competition from other software providers.
Although Salesforce remains the largest CRM provider in the world, it’s not as clear as it once was that the company can maintain its position indefinitely.
Salesforce has also struggled to produce good margins as it has matured. Despite massive revenue increases, the company has rarely achieved operating margins in excess of 5 percent over the last 10 years.
In part, this fact is due to a string of high-profile acquisitions. The lack of acceptable margin at Salesforce has been one of the driving forces behind a recent management shakeup that has also contributed to volatility.
Finally, Salesforce has also been subject to the same macroeconomic trends that have exerted downward pressure on other large tech firms.
Rising interest rates, slowing spending on digital business products associated with the end of the pandemic and higher costs have all hit Salesforce. In combination with its unique challenges, these factors have pushed the stock down to multiyear lows.
Salesforce Revenue, Earnings and Growth
In Q3, Salesforce’s revenue rose 14 percent on a constant currency basis, reaching $7.84 billion. For Q4, the company expected year-over-year growth of 12 to 13 percent. Full-year revenue guidance suggests that overall revenues will be 20 percent higher than in 2021.
On a GAAP basis, Salesforce earned $0.21 per share in the third quarter. Non-GAAP adjusted earnings were $1.40 per share, $0.19 above the analyst consensus estimate of $1.21.
Non-GAAP operating margin was 22.7 percent, while GAAP operating margin improved to 5.9 percent. The margin rates point to improving profitability at Salesforce, which will be a requirement for any kind of major stock recovery.
While Salesforce may not achieve explosive growth in the next few years, the projected growth rates for the company are reasonably fast.
Forward earnings are expected to be about 21.4 percent higher than the trailing 12-month period. The 5-year expected growth rate for Salesforce, meanwhile, is about 15.4 percent.
Salesforce Target Price and Valuation
Analyst price forecasts suggest that Salesforce could have a great deal of upside potential over the coming 12 months. Currently trading at $128.22, the stock is expected to rise to a median target price of $200.
This would represent a single-year upside of 56 percent. A discounted cash flow forecast analysis suggests a fair value of $213 per share, 66 percent higher than its current price. 37 of the 50 analysts offering ratings on the stock recommend it as a buy.
Salesforce’s valuation metrics aren’t exceptional, but they are reasonable for a company with its growth potential. The stock trades at 26 times forward earnings, 4 times sales and 2 times book value.
Given the company’s cash flow of $7.22 per share and its low debt-to-equity ratio of 0.16, though, its valuation is far from a red flag for investors.
Slowing Sales Growth
The biggest risk factor for Salesforce at the moment is its slowing rate of sales growth. Although the company is still performing reasonably well, it isn’t achieving anything near the rate of growth it did during the COVID-19 pandemic. As such, investors will need to price less aggressive growth in for the foreseeable future.
Competition also represents a considerable risk for Salesforce as other tech companies seek to displace it as the leading CRM provider.
Adobe and Microsoft, in particular, could be in excellent positions to compete with Salesforce for market share. Given Salesforce’s shrinking customer satisfaction rates, competitive forces may be a problem for the company.
Finally, Salesforce is quite sensitive to macroeconomic forces due to its dependence on business investment in software tools. While businesses have spent ample money on software solutions over the past several years, the prospect of a recession next year could cause many companies to tighten their belts. This would have a pronounced but ultimately temporary impact on Salesforce’s revenues.
Will Salesforce Recover in 2023?
Salesforce almost certainly has the potential to recover in 2023. Low margins and competition aside, Salesforce’s software remains a go-to solution within the CRM space.
Although the company will need to be more proactive in addressing some of its problems going forward, there’s no immediate indication that Salesforce will cease to be the dominant CRM in the near future.
At today’s prices, Salesforce trades at a reasonable valuation and offers enough upside potential to produce solid returns even if the company underperforms expectations.
Q3’s results also offer early indications that management’s efforts to deliver higher margins may be bearing fruit. As such, Salesforce stock is likely an asymmetrical risk with more probable upside than downside.
Trends in institutional ownership of Salesforce also suggest that Wall Street is anticipating a recovery for the stock. 77 percent of the company is currently owned by institutional investors, and inflows have considerably outweighed outflows over the past 12 months. While there has also been a decent amount of selling, this trend points to a general bullishness on the stock among investment professionals.
Keeping these advantages in mind, it’s also important to recognize that Salesforce carries real risks. Competing CRM providers may not take Salesforce’s place in short-term, but the company will need to improve its customer engagement to remain at the top of its field on a longer-term basis.
The new management team will also still need to prove that it can manage the company’s affairs during what could be challenging times.
While Salesforce may not recover until later next year when the economy at large begins to improve again, the company still shows a great deal of promise.
Salesforce remains the leading provider of an increasingly essential business software product, and it seems to be making early moves in the right direction on profitability. Investors willing to ride out some more volatility to realize potentially large gains will likely find Salesforce attractive despite its risks.
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