On Thursday, Citi revised its outlook on Salesforce.com (NYSE:CRM) shares, reducing the price target from $323.00 to $260.00, while maintaining a Neutral rating on the stock. The adjustment follows Salesforce's reported revenue miss and the issuing of weaker second-quarter guidance.
The company's adjusted cRPO (current remaining performance obligations) for the first quarter of 2025 fell short by approximately 150 basis points, a discrepancy described as the worst the analyst could recall. This shortfall led to a 16% drop in Salesforce's shares after hours.
The analyst attributed the disappointing performance to a resurgence of macroeconomic headwinds. Additionally, go-to-market strategy changes, execution issues, and overly optimistic guidance based on the previous quarter's results were cited as contributing factors.
The fourth-quarter strength was previously seen as a positive sign, but it now appears to have been a misjudgment, as it was likely due to a budget flush rather than sustainable growth.
The first quarter has historically been a weaker period for software companies, but the magnitude of Salesforce's miss suggests potential company-specific problems.
These issues may include reduced seat exposure, down-sells, and increased competition, which could continue to impact the business into the second quarter and beyond.
Despite the company's current valuation being seen as reasonable at 20 times earnings per share and 18 times enterprise value to free cash flow for fiscal year 2025, the analyst expressed caution due to the slowing growth and the lack of estimates that account for these risks.
Citi's reassessment also pointed to the aggressive revenue outlook for fiscal year 2025, which implies a need for significant acceleration in the second half of the year compared to the second quarter.
The analyst concluded that while the valuation is not demanding, with the current challenges and active mergers and acquisitions in the sector, a cautious stance is warranted.
The firm is awaiting signs of improving growth or more concrete evidence of momentum and monetization from Salesforce's Data Cloud and GenAI initiatives before adopting a more optimistic position.
InvestingPro Insights
In light of Citi's recent reassessment of Salesforce.com (NYSE:CRM), the following insights from InvestingPro may provide additional context for investors considering the stock. Salesforce boasts a perfect Piotroski Score of 9, indicating a strong financial position, which could be reassuring amidst concerns over its recent earnings miss. Additionally, the company is trading at a high earnings multiple with a P/E ratio of 63.87, reflecting investor confidence in its future growth prospects despite the current challenges.
InvestingPro Data highlights that Salesforce has a market capitalization of $263.47 billion and has experienced a revenue growth of 11.18% over the last twelve months as of Q4 2024. The company's gross profit margin stands at an impressive 75.5%, underscoring its ability to maintain profitability. Furthermore, analysts predict the company will be profitable this year, which aligns with its performance over the last twelve months.
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