Shares of Marc Benioff’s misunderstood enterprise software empire Salesforce (CRM) are down 3% over the past five days. I am bullish on CRM stock.
The guidance for Fiscal Year 2023 is nothing short of encouraging. Still, investors seem confused as to which direction CRM stock should be headed next.
Salesforce shares may still seem expensive at over 140 times trailing earnings. At the same time, the company has enviable growth prospects for a firm its size.
Growth may be tapering off a bit, but operating margins are headed in the right direction. That’s a great sign as the firm looks to raise the bar on profitability prospects going into a higher-rate environment.
Could it be that Salesforce is in the sweet spot right now, as it moves to become less of a sales growth play and move of an earnings grower? I think it could be.
Salesforce has a knack for topping estimates. Even with a raised bar ahead of it, I wouldn’t doubt a future blowout as the firm continues bringing out to best in Slack — a deal scoffed at by many investors.
Given the timing of the Slack deal (before a catastrophic sell-off in expensive tech stocks), it’s understandable that many are wary of CRM stock.
In due time, though, I do think Benioff will pull back on acquisitions, with a focus on taking recently-acquired technologies to the next level and enhancing them with Salesforce’s comprehensive software suite.
Big Earnings Beat
Salesforce clocked in $7.33 billion in sales for the fourth quarter, up 26% year-over-year, capping off a Fiscal Year 2022 that saw 25% in year-over-year top-line growth.
Co-CEO Marc Benioff was pleased with the results himself and was confident enough to raise both its first-quarter and full-year 2023 guidance.
As always, Benioff set his sights on building upon its strengths in the new fiscal year, with sights set on bolstering sales, margins, and cash flows.
Indeed, this is what investors want to hear from a growth company in a rising-rate environment. Moving ahead, management reaffirmed that margins can grow by as much as 125 bps per year.
Despite the beat and raise, investors seemed unenthused. The stock was given a boost at the opening only to end the day up by a meagre amount that was eventually surrendered in Wednesday’s after-hours session.
Could it be that investors are still upset over Slack and the potential for Benioff to pursue yet another sizeable tech acquisition?
Perhaps. The Slack integration is a potential drag on margins. That said, I think Benioff will be proven right at the end of the day. The wildly popular work messaging platform seems to me like a very effective onramp to Salesforce’s intriguing offerings.
Wall Street and investors may very well be discounting the longer-term impact of Slack on Salesforce’s growth. The fact that margins are still robust leads me to believe that Benioff is continuing to put his foot on the gas with his incredible efforts.
Wall Street’s Take
According to TipRanks’ analyst rating consensus, CRM stock comes in as a Strong Buy. Out of 28 analyst ratings, there are 24 Buy recommendations and four Hold recommendations.
The average Salesforce price target is $303.19, implying an upside of 49.6%. Analyst price targets range from a low of $225 per share to a high of $375 per share.
Bottom Line on CRM Stock
Another great quarter for Salesforce is in the books. With growth to remain above 20%, while the firm looks to drive margins, I think CRM stock is one of few firms that ought to be granted a free pass amid this sell-off in high-multiple tech.
Arguably, Salesforce is well on its way to joining the likes of its big brothers in the FAANG basket. If Benioff continues pole-vaulting over his own expectations like this while becoming quieter on the M&A front, I think it will be hard to ignore CRM stock any longer.
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