- Salesforce stock is down 40% this year as investors shun high-growth stocks amid risk of a recession
- Salesforce is also struggling to expand its margins and justify its massive acquisitions over the past decade
- Despite the economic headwinds, CRM stock is a long-term winner in an environment where digital transformation is gaining momentum
It seems investors aren’t yet ready to bet on Salesforce.com (NYSE:CRM) again. The world’s largest provider of cloud-based customer-relations software has seen its stock plunge about 40% this year and 50% from its peak last year, underperforming its peers and the benchmark indices.
The major reason behind this steep bearish spell is that investors aren’t sure what lies ahead for the company. As the economic horizon becomes cloudy amid the risk of a recession next year, companies are cutting back on their spending and making it difficult for CRM to expand its sales.
Source: Investing.com
When San Francisco-based Salesforce issues its next quarterly report, set for Wednesday after the market close, analysts expect sales to reach $7.83 billion in the period ending October, up about 14% from the same period a year earlier.
The pace of growth, which has slowed considerably from the peak last year, may generate $1.22-a-share profit. According to InvestingPro+ data, analysts don’t see much growth on this front in the next 12 months amid an increasingly challenging operating environment for software companies. There have been 33 downward revisions in the past three months for Salesforce EPS and just three upward revisions.
Source: InvestingPro+
Also hurting CRM is the company’s struggle to expand its margins - an important benchmark for justifying its massive spending on acquisitions over the past five years.
The company last year expanded its business-productivity products with its $27.7 billion purchase of the messaging platform Slack, which was completed in July 2021. Before that, it bought data-analytics firm Tableau, as well as integration-software provider MuleSoft.
While these acquisitions have expanded its customer-enticing product offerings, the company’s margin expansion has lagged that of competitors.
Starboard, which recently announced it was taking a significant stake in CRM, said last month that Salesforce’s new financial targets are less ambitious than those of the company’s rivals, including ServiceNow (NYSE:NOW) and Workday (NASDAQ:WDAY). Starboard CEO Jeff Smith has relayed Salesforce is a great business that needs to maintain better focus on improving margins.
The company is aiming for a 25% adjusted operating margin, including future acquisitions. That compares with the 20% target Salesforce announced a year ago for its 2023 fiscal year. The adjusted operating margin was 19.9% in the quarter ended July 31.
A Long Runway for Growth
Despite these challenges, and the beatdown shares have taken this year, there is a strong case for CRM’s long-term appeal, in my view, and the stock’s current weakness is a buying opportunity.
First, Salesforce's products help companies drive revenue growth by improving the productivity of their sales teams, an area in which both big and small companies have no choice but to continue investing. For that reason, I rank Salesforce among essential technology companies like Microsoft (NASDAQ:MSFT).
Second and most important, digital transformation globally is still in its early stages and there is a long runway for growth ahead for Salesforce. According to a recent research report published by Information Services Group, “the COVID-19 pandemic has accelerated enterprise digital transformation by three to five years as companies build IT ecosystems to enable growth, innovation and improved customer experiences under new conditions.”
Salesforce Revenue Growth
Source: InvestingPro+
Salesforce, with its wide competitive advantage and diversified product offerings, is well positioned to increase its sales in this growth environment. The company is targeting $50 billion in revenue by 2026, which is nearly double what the company made last year. There could be some bumps in this road, but as the stock is down considerably from its peak last year, this is a good time for patient investors to buy CRM stock.
Due to CRM’s long-term appeal, analysts are generally bullish about this name. In an Investing.com poll of 51 analysts, 80% of the forecasters rate CRM a buy with their 12-month consensus price target, showing 40% upside potential.
Source: InvestingPro+
Macquarie, which gives Salesforce an outperform rating and a $210 price target, said in a recent note that Salesforce is less vulnerable to global macro headwinds due to the importance of CRM tools for companies:
“We view the Customer Relationship Management market as a critical one, sticky, and involved in multi-year organizational digitalization plans that have only been accelerated by the COVID-19 pandemic, making businesses increasingly aware that they must be able to exist in a disrupted world by leveraging technology."
The firm added that it believes the company "is a top strategic IT vendor, engaged in multi-year digital transformation plans for many large organizations that scale across countless industries and governmental organizations.”
Bottom Line
Salesforce could experience a bumpy road in the next 12 to 18 months as the economic headwinds hurt growth in the short run and investors monitor how the company preserves its margins. But the company is a safe long-term bet on the digital transformation that is gaining pace in the post-pandemic world.
Disclosure: As of the time of writing, the author doesn't own Salesforce stock. The views expressed in this article are solely the author's opinion and should not be taken as investment advice.