Cloud-based software company Salesforce’s (NYSE:CRM) management took a cautious stance during the Q2 conference call and lowered the full-year revenue and earnings outlook, citing macro headwinds. Despite the guidance cut, Wall Street analysts remain optimistic about Salesforce because of its ability to deliver durable revenue growth and defend margins. Further, secular tailwinds from the ongoing digital shift are keeping analysts positively inclined toward CRM stock.
What Is Salesforce Used For?
Salesforce provides customer relationship management technology that helps enterprises connect with their customers. The company’s software and services primarily focus on sales, marketing, and analytics. Salesforce generates revenues from subscriptions and professional services, with subscription revenues accounting for about 93% of its total sales.
Before we dig deeper, let’s zoom in on factors that are hurting Salesforce’s growth.
Risk Ahead for Salesforce
Macro headwinds are taking their toll on enterprise spending, and Salesforce is not immune to it. During the Q2 conference call, CRM’s CFO Amy Weaver stated, “We started to see more measured buying behavior from our customers, which began in the last months of the quarter. This resulted in stretched sales cycles, additional deal approval layers and deal compression. In addition, we saw slowing in our create-and-close, Slack self-serve and SMB businesses, which tend to be leading macro indicators.”
Along with macro headwinds, adverse currency movement could further remain a drag on CRM’s top line in FY23.
CRM’s management now expects FY23 revenue to be in the range of $30.9 billion to $31 billion, down from its previous forecast of $31.7 billion to $31.8 billion. Due to the lower sales forecast, CRM expects to deliver adjusted earnings in the range of $4.71-$4.73 per share, compared to its earlier projection of $4.74-$4.76 per share.
Analysts Looking Beyond Short-term Headwinds
Analysts have lowered their projections to reflect management’s cautious tone and guidance cut. However, they see CRM as well-positioned to benefit from the ongoing digital transformation.
William Blair analyst Arjun Bhatia sees the macro backdrop as a drag on CRM’s financials for the next few quarters. However, the analyst is bullish about its prospect due to the solid “enterprise presence, broad product portfolio, and experience navigating difficult macroeconomic cycles.”
Bhatia also highlighted CRM’s focus on driving efficiency and the ability to defend margins despite challenges. It’s worth mentioning that CRM lowered its full-year revenue forecast but reiterated its adjusted operating margin guidance for FY23. CRM expects to deliver an adjusted operating margin of 20.4%.
Echoing similar sentiments, Monness analyst Brian White expects CRM to capitalize on the digital shift. Highlighting CRM’s offerings, White stated that its “platform is stronger and more relevant than ever” for customers. Further, the analyst expects CRM to benefit from the acquisition of Slack.
Will CRM Stock Go Up?
CRM stock forecast on TipRanks shows significant upside potential. CRM stock has received 29 Buy and four Hold recommendations for a Strong Buy rating consensus. Meanwhile, CRM’s average price target of $225.19 implies 46.5% upside potential over the next 12 months.
Along with analysts, CRM stock has positive signals from hedge funds and retail investors. Hedge funds bought 3.9M CRM stock last quarter. Meanwhile, 2.1% of investors holding portfolios on TipRanks increased their exposure to CRM stock in the last 30 days.
All in all, CRM stock sports an Outperform Smart Score of nine out of 10 on TipRanks.
Bottom Line: CRM’s Fundamentals Remain Strong
CRM has consistently delivered solid revenue despite the challenging operating environment. Its top line has doubled in three years (from $13.3 billion in FY19 to $26.5 billion in FY22), which is encouraging. Though macro headwinds will lead to a slight moderation in its growth, CRM is poised to gain from the increased enterprise spending on digital transformation.
Overall, the fundamentals of Salesforce remain strong. Further, the company announced its first-ever $10 billion share repurchase program in the second quarter, which should act as a positive catalyst for CRM stock.
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