Thursday Oct 5 2023 10:36
6 min
Salesforce (CRM) stock rallied over 5% on Thursday following the release of its robust earnings report, which demonstrated that its cost-cutting measures were working, and that demand remained resilient in the face of tough economic conditions in the U.S.
While traders eye inflation readings and interest rate guidance from the Federal Reserve, and the S&P 500 slipping 1.6% in August, posting its worst month since February and snapping a 5-month win streak, Salesforce is riding high, having beat industry estimates.
The provider of business software, known for products like Slack and Tableau, was poised to increase its market value by close to $10 billion. The stock's performance has exhibited a remarkable rise of over 60% throughout this year.
According to the report, Salesforce's revenue increased by 11% in Q2 2023 compared to the same period in the previous year. The company's net income also went up to $1.27 billion, which translates to $1.28 per share. This is a significant rise from the $68 million — or 7 cents per share — recorded in the same quarter of the preceding year.
On Wednesday, Salesforce elevated its annual projection for adjusted operating margin from 28% to around 30% — a move that was highly praised by Wall Street analysts. The company’s CFO, Amy Weaver, emphasized that this revised figure represents "is a floor, not a ceiling".
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The decision to enhance profitability was well received, especially considering that the company had historically emphasized growth through acquisition, with analysts lauding the benefits of this aggressive profitability drive.
Earlier in the year, under the influence of activist investors, the company undertook measures such as staff cuts, office space reduction, and cutbacks in employee benefits to boost profitability, which had lagged that of its competitors for years.
The report released on Wednesday also allayed concerns regarding the company's decelerating growth. While the second-quarter revenue growth of 11% was slower than historical rates of 20% to 30%, it comfortably exceeded Wall Street predictions. Salesforce also raised its annual revenue forecast.
In response to the downturn in tech spending, the company introduced an array of artificial intelligence features and implemented its first price hike in seven years.
These positive results are expected to bolster investor confidence in the company. Brokerage Raymond James commented that CRM shares “are simply too low priced" for a firm that is performing well in a challenging economic environment.
Salesforce's forward 12-month earnings estimates translate to a price-to-earnings (P/E) ratio of 25, compared to the industry median of 15.14.
Salesforce was founded in 1999 by Marc Benioff, who was previously a sales executive at Oracle, a prominent global software firm. He did so with three business partners – Parker Harris, Dave Moellenhoff, and Frank Dominguez — with the initial funding for the project coming from Larry Ellison, the CEO and founder of Oracle, as well as Halsey Minor, the founder of CNET, along with several other investors.
Benioff’s vision for the firm was centered on providing software access to the public around the clock through a worldwide cloud computing framework. This meant companies didn't have to buy expensive software and computers from companies like SAP or Oracle and set them up in their own offices, which was both difficult and costly.
After gaining recognition among its network of 8,700 customers and potential backers, Salesforce conducted its first public offering in 2004, generating $110 million in funds. The stock's value on the first day was set at $17.25.
The company's growth continued, and by 2009, its yearly revenue surpassed $1 billion, with an impressive customer base of 55,000.
In just two more years, Salesforce nearly doubled its customer count, reaching 100,000, and gained even more prominence when Forbes labeled it as "the world's most innovative company."
In 2017, the company reported annual revenues of $8.3 billion, which grew to $10.4 billion a year later.
The company further enhanced its standing by making its largest acquisition ever – a $6.5 billion investment in MuleSoft, a vendor specializing in cloud computer integration, boasting major clients like Coca-Cola.
As of August 2023, Salesforce shares are trading for over $220 on the NYSE, while CRM’s market cap stands close to $210 billion, with potential future growth expected by Wall Street analysts across the board.
Raymond James analysts cited in a Reuters report stated that the potential for margin expansion is substantial. The brokerage was one of 26 that increased their price targets for Salesforce's stock, resulting in a median CRM stock price projection of $255, according to Refinitiv data. This figure is almost 19% higher than the stock's most recent closing price.
Other analysts to raise their price targets included Truist Securities’ Terry Tillman, who raised his target price from $250 to $275 while maintaining a Buy rating on the stock, and JPMorgan analyst Mark Murphy, who maintained an Overweight rating while raising the price target to $240 from $230.
Analysts at BNP Paribas were highly optimistic on the cloud-based software company, raising their 12-month CRM stock forecast to $336 to $329 while maintaining an Outperform rating, while Jefferies raised its Salesforce stock projection to $275 from $250 with a Buy rating.
In his overview of CRM stock on August 31, Morningstar analyst Dan Romanoff wrote:
“Salesforce delivered another good quarter with revenue and profitability ahead of our expectations. Based on quarterly upside and updated guidance, we refined our model toward slightly better profitability, and as a result we raise our fair value estimate to $255, from $245. We still see some upside from here for shares.”
When considering Salesforce stock price forecasts, remember that trading involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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