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Salesforce Rides on Rapid Digital Transformation; Street Impressed
Stock Analysis & Ideas

Salesforce Rides on Rapid Digital Transformation; Street Impressed

Enterprise cloud solutions provider Salesforce (NYSE: CRM) delivered better-than-expected fourth-quarter Fiscal 2022 (4QF22) results, and raised its guidance for FY23 revenue growth to 21% from 20%. It was evident that the company is cashing in on the accelerated digital transformations that are taking place across industries, and the growing enterprise spending on the same.

The raised revenue guidance includes a contribution from its impending acquisition of an app development and Salesforce consulting firm, Traction on Demand. The acquisition is expected to close during the ongoing quarter.

In the earnings call, management reiterated its view for FY23 non-GAAP operating margin of 20%. This is an advancement of 130 basis points from that of FY22, despite factoring in 100 to 125 basis points of headwinds from M&A, which is encouraging.

Expert Points Out Red Flag Areas

Following the print, Needham analyst Scott Berg analyzed the management’s FQ4 commentary and emerged with mixed sentiments about the CRM stock. “While we are pleased the company reiterated its 20% non-GAAP operating margin guidance and strong cash flow expectations, we still seek validation on the company’s commitment to profitability improvements and how its scale should be able to drive significant margin leverage in FY23,” he weighed in, highlighting his reservations about the ability of Salesforce to improve its profits enough to reach its operating margin goal.

Moreover, the analyst said that although demand for acquired software company MuleSoft was strong in FQ4, revenue contribution from it is expected to slow down in the second half of this calendar year, as it faces scaling-related headwinds.

Also, foreign exchange fluctuations are expected to continue playing spoilsport to Salesforce’s FY23 prospects.

Silver Linings to Consider

Nonetheless, Berg was upbeat about how Salesforce sailed through headwinds coming from currency fluctuations in Europe and APAC.

Most importantly, the analyst noted that digital transformation was the key driver for new deal wins as well as expansion of existing deals. Moreover, Salesforce’s strong solutions for industry-specific purposes attracted most of the multi-cloud deals of the quarter. Additionally, the number of 7-figure deals signed in FQ4 was 34% higher than in the prior-year quarter, while the number of 8-figure deals doubled.

Berg also pointed out that solid revenues and gross margin led to better-than-expected expansion in non-GAAP operating margin, despite higher-than-estimated operating expenses. This gave the analyst encouragement about Salesforce’s strength.

Wall Street Rates Salesforce

Considering the takeaways mentioned above, Berg decided to maintain a Hold rating on Salesforce. Wall Street consensus, however, is more optimistic than Berg. The consensus rating for the company is a Strong Buy, based on 24 Buys and 4 Holds. The CRM stock price predictions point at an average price target of $305.96.

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