Bull of the Day: Salesforce (CRM)
Salesforce (CRM) surged after the firm topped Q4 FY23 estimates on March 1 and provided upbeat guidance. The vanguard of modern business software assured activist investors and Wall Street on its earnings call and with its updated outlook that Salesforce is ready to focus on profitability over nearly everything else.
Salesforce is poised to boost its margins and buybacks in the near term instead of chasing further acquisitions. CRM shares have surged over 35% YTD, yet they still hover near pre-pandemic levels from early 2020. Plus, Salesforce’s valuation has improved dramatically.
Salesforce’s subscription-based offerings remain critical to around 150,000 companies in our digital-driven world. All told, it might be time to consider buying Salesforce stock as a long-term stable tech play.
Business Essentials
Salesforce helped start the software-as-a-service industry that nearly every business, government, and countless other entities rely on today to help them accomplish just about everything. Its various divisions support sales, marketing, commerce, communication, customer and client engagement, analytics, app development, and beyond.
The company has grown its top line at an impressive clip since its 2004 IPO. CRM posted between roughly 25% and 35% sales growth for 10 straight years through its fiscal 2022—going from $3.1 billion in FY13 to $26.5 billion in FY22 (2021). Salesforce’s massive and steady expansion highlights the strength of its business model and the constant need for companies of all shapes and sizes to adapt to the quickly changing tech-fueled business landscape.
Salesforce made a few large acquisitions over the last several years to expand its reach. These efforts include its $28 billion deal to buy Slack in the summer of 2021 to help CRM compete against Microsoft (MSFT) and Zoom Video (ZM) in the evolving work communication space. The deal came roughly two years after Salesforce paid $15 billion for data analytics platform Tableau.
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Recent Performance & New-Found Profitably Focus
Salesforce’s fiscal 2023 (2022) revenue jumped 18% (22% in constant currency) to $31.4 billion to help boost its adjusted earnings by 10%. The firm’s adjusted operating margin popped from 18.7% in FY22 to 22.5% in FY23. The company also topped our Q4 FY23 estimates on March 1, with CRM beating the Zacks EPS estimates by 24%.
Looking ahead, which is always far more important, CRM projects adjusted operating margins of about 27% in FY24. It was only last year that Salesforce executives laid out a plan to boost its adjusted operating margins to 25% by 2026. “Improving profitability is our highest priority, and that really showed up this quarter,” co-founder and CEO Marc Benioff said on its recent earnings call.
“Our goal is to make Salesforce the largest and most profitable software company in the world, and that is what we are doing.”
The chief executive said the firm needed to “repress the hyperspace button” on its transformation plan for profitable growth. The accelerated transformation plan includes short-term and long-term restructuring, which includes reducing its workforce, lowering real-estate costs and spending, as well as improving profitability and productivity over the long haul.
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Salesforce also said it’s disbanding its M&A committee. All of these pushes toward greater profitability come amid an activist investor push and slowing growth, which coincides with a slowing economy, its sheer size, and more. Salesforce is focused on a transformational FY24 that includes a beefed-up share repurchase plan from $10 billion to $20 billion.
Salesforce provided upbeat top and bottom-line guidance for the current fiscal 2024. Current Zacks estimates call for its revenue to climb 10.5% this year to $34.6 billion and then another 11% in FY25 to $38.5 billion.
Better yet, its adjusted earnings are projected to climb 33% and 26%, respectively during this same stretch. On top of that, CRM’s consensus FY24 and FY25 earnings estimates have surged since its recent release it to help it land Zacks Rank #1 (Strong Buy) right now.
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Other Fundamentals
Salesforce stock is up roughly 36% YTD to crush the S&P 500’s 4% pop and the Zacks Tech sector’s 13% climb. CRM shares are now comfortably above its 50-day and 200-day moving average. Plus, the stock just experienced a so-called golden cross, which is when the shorter-term moving average crosses over a major long-term moving average.
At roughly $180 per share, Salesforce stock trades 18% below its average Zacks price target and still sits around 40% beneath its 2021 peaks. The downturn, coupled with its hugely improved earnings outlook has Salesforce trading at 30.4X forward 12-month earnings. This marks a massive discount to its five-year highs of 206X and its five-year median of 120X. This time last year, CRM was trading at 90X forward earnings.
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Bottom Line
A recent pullback has Salesforce stock back under overbought RSI levels (70 and above) at 61. And Wall Street is rather bullish on Salesforce, with 22 of the 37 brokerage recommendations Zacks has at “Strong Buys,” alongside only one “Strong Sell.”
Salesforce’s subscription software offerings aren’t going out of style anytime soon in our digital world. And the firm’s new-found focus on margins and profitability should attract long-term investors to this tech giant.
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