On Thursday, Goldman Sachs (NYSE:GS) adjusted its outlook on Salesforce.com (NYSE:CRM) shares, reducing the price target to $315 from the previous $345, while still maintaining a Buy rating on the stock.
The reassessment comes after Salesforce's first quarter 2025 results did not meet investor expectations. The company reported a subscription revenue growth of 12.3% and an operating margin (OPM) of 32.1%, which aligned with forecasts.
However, current remaining performance obligations (cRPO) growth was reported at 9.5%, falling 150 basis points short of expectations.
Salesforce's second quarter guidance suggests an approximate 7-7.5% increase in top-line growth and a 9% rise in cRPO. The stock experienced a significant after-hours drop of 16%, indicating investor concerns about whether the challenges facing the company are structural or cyclical in nature.
Despite these worries, Goldman Sachs sees potential reasons for optimism, citing possible easing of interest rates and less uncertainty post-elections this year, along with the growth potential from Generation Artificial Intelligence (Gen-AI).
Goldman Sachs highlighted several factors that could contribute to Salesforce's revenue rebound next year. These include expectations of results increasingly favoring the fourth quarter as the company grows beyond $35 billion in sales and finalizes go-to-market changes.
Additionally, Salesforce's low attrition rate of around 8% and successful cross-selling efforts due to a more streamlined sales motion could lead to more efficient up-selling in a better software spending environment. The firm also noted Salesforce's strong position in industries, which allows it to offer differentiated Gen-AI solutions.
The investment firm remains optimistic about Salesforce's potential for meaningful margin expansion, independent of the macroeconomic cycle.
With its considerable advantage of differentiated front-office data, Goldman Sachs argues that Salesforce is an underappreciated Gen-AI winner.
Despite the current macro uncertainties affecting the broader software market, the firm upholds its confidence in Salesforce as a high-quality software franchise.
InvestingPro Insights
Amidst the recent adjustments in Salesforce.com's (NYSE:CRM) stock outlook by Goldman Sachs, insights from InvestingPro reveal a nuanced perspective on the company's financial health and market position. Salesforce boasts a perfect Piotroski Score of 9, indicating a strong financial position, which is further corroborated by their ability to comfortably cover interest payments with their cash flows. Additionally, the company is recognized as a prominent player in the Software industry, a factor that could be pivotal in navigating the current market dynamics.
InvestingPro data underscores the company's robust financial metrics, with a significant market capitalization of $263.47 billion and a healthy revenue growth of 11.18% over the last twelve months as of Q1 2024. Moreover, Salesforce operates with a moderate level of debt, which is a reassuring sign for investors concerned about financial stability. While the company is trading at high earnings, EBIT, and EBITDA valuation multiples, analysts predict Salesforce will remain profitable this year, a sentiment that aligns with Goldman Sachs' optimistic outlook.
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