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Salesforce is in need of ‘a macro catalyst’, such as a Ukrainian victory: Analyst

CFRA Senior Equity Analyst John Freeman joins Yahoo Finance Live to review Salesforce's latest earnings report, its co-CEO's announced resignation, and the geopolitical pressures impacting the tech sector throughout 2022.

Video Transcript

[AUDIO LOGO]

SEANA SMITH: So let's take a look at Salesforce because the stock getting hit in extended trading. You're looking at losses of just around 5 and 1/2%. The company beating on both the top and bottom lines for the third quarter, but fourth quarter revenue guidance weighing on the stock just a bit. Also, co-CEO Bret Taylor is also stepping down as vice chair and co-CEO of Salesforce, effective January 31. Marc Benioff will be the chair and CEO.

We want to bring in John Freeman, CFRA Senior Equity Analyst, to break all this down for us. John, going into this report, you had a strong buy rating, a price target of 284 bucks. Lots to dig into in this release. I guess, what's jumping out to you?

JOHN FREEMAN: So the thing that jumped out the most, I mean, I wasn't surprised by the high operating margin. Marc Benioff said it was record operating margin. I knew that pulling back the lever right on costs was going to really pop earnings, given the inherent operating leverage of this business, right? And it's the first quarter of them doing that. But what surprised me, to the downside, was that fourth quarter revenue guidance of 8% to 10% year over year growth.

That's the first time-- that 3.9% right now, it'd be the first time, I think, in any quarter that Salesforce has only grown in single digits. Not that that necessarily means anything, but it was definitely lower than I expected and clearly lower than the market gave back pretty much the gains that we saw today.

SEANA SMITH: And, John, your reaction to Bret Taylor, the co-CEO, stepping down?

JOHN FREEMAN: You know, I guess I'm-- you know, I was like, oh, you know, surprise. But I'm actually not that surprised. You know, Marc Benioff is a very unique individual and an amazing CEO. And I just think it might-- I know he's trying to groom somebody or share some of the load there, but, you know, it's the Benioff show there, right? And I don't really read much into it negatively. He's gone through a couple of these co-CEO sort of situations. And so, you know, I don't know if I would read into it like, for example, in a normal situation when a CEO or a CFO resigns. You know, I don't think it's that kind of thing here.

SEANA SMITH: It doesn't sound like you think or you're viewing this as a huge loss, at least for now. But, John, I think the big question is, what's going to be the catalyst in 2023? Because Salesforce one of the worst performers, the second worst performer in the Dow this year. We know the tech sector overall has had a very tough time over the last several months. What's it going to take to turn things around?

JOHN FREEMAN: So the first thing is the-- let's say nothing really changes much in the macro, right? What will happen is, what I expect to happen is, that Salesforce will grow in the low single-- in the low double digits, rather, the low teens revenue top line, but earnings should grow much faster. And I think it will surprise people. Like, they beat-- the earnings beat today was pretty solid, $0.18. And I think you're going to see that going forward in the next couple quarters. That'll help the stock.

But what we really need is a macro catalyst, something like, for example, Ukraine coming through with a breakthrough victory, as a lot of military experts expect now. And I think that would be a catalyst. That would bring oil prices down, right? It would take some of that geopolitical risk that's been hanging over the market and kind of ease it off a bit, you know? I think that would happen. But, you know, obviously, that's something that could happen in the last couple of months, or maybe not until-- not until next year.

DAVE BRIGGS: Yeah, I was going to say, do not hold your breath on that ending any time soon. Anything in this report give you pause about that price target that Seana mentioned, the 284?

JOHN FREEMAN: Well, you know, yeah. So the guidance on revenue, that was really light, again. So that gave me pause. But you know what? This company has such good fundamentals. It's such a solid core of recurring sticky revenue. On the margins, some people might leave-- people might leave the platform. But overall, it has really good economics. So I think this is a company that you want to own for the long term. And given its track record, I think it's proven itself over time as a great long-term investment. And I think it will continue to do so.

SEANA SMITH: John, what about just some of those headwinds out there, mounting competition from Microsoft's Teams, also the pricing pressure that Salesforce is facing right now, how do you gauge that?

JOHN FREEMAN: Sure. So Teams and Slack kind of are a duopoly now in the, call it, the real-time collaboration space, right? And I think that's kind of a natural situation. I don't think that's-- I don't think one side is necessarily going to get it over on the other side, right? In situations where it's a very sales-centric organization or large sales-- large sales departments inside of larger organizations, right, that Slack and Salesforce integration is really effective.

And it definitely has a better, sort of-- [INAUDIBLE] a large enterprise anyway, a better traction than, say, Microsoft Teams, which has done very well as a non-integrated with anything, just sort of a platform for collaboration. So I don't necessarily see share take there being a big deal. What I do see is enterprise cloud migration continuing a pace. Really, because of all this financial pressure, these companies want to go asset light, go more-- go more agile. So I think on a relative basis, compared to software-- legacy software like Oracle, I think they've got big problems.

DAVE BRIGGS: Excellent stuff from John Freeman. Appreciate you being here, sir.