In many cases, layoffs announced at publicly traded companies tend to lift the underlying securities. Essentially, such negative actions communicate to shareholders that the impacted companies are serious about righting the ship. So, it’s not surprising that Salesforce (NYSE:CRM) benefitted from a recently announced headcount reduction. Still, making the upside stick for the long haul represents an entirely different story. I am skeptically neutral on CRM stock.
Don't Miss our Black Friday Offers:
- Unlock your investing potential with TipRanks Premium - Now At 40% OFF!
- Make smarter investments with weekly expert stock picks from the Smart Investor Newsletter
Last week, the cloud-computing solutions firm announced that it cut hundreds of workers from its sales team. According to Bloomberg, the headcount reduction initiative centered on Salesforce’s efforts to improve profitability amid a challenging environment. Given the rise of several macroeconomic headwinds, demand for the company’s software products slipped.
“Our sales performance process drives accountability. Unfortunately, that can lead to some leaving the business, and we support them through their transition,” a Salesforce spokesperson said in a statement last Tuesday.
To be fair, the recently announced layoffs don’t represent an exclusive blight on CRM stock. Several other prominent names in the broader technology sphere also announced cuts or are planning on swinging the axe.
However, CRM stock does stand out for the underlying dramatic swings in sentiment. According to the aforementioned Bloomberg report, Salesforce “almost tripled its workforce in the past five years, in large part through dozens of acquisitions.” That may have been fine when money was cheap. Now that the Federal Reserve appears committed to its hawkish monetary policy, money has effectively become more expensive.
Stated differently, the central bank will seek to aggressively tighten the money stock to combat historic highs in inflation. However, this action will leave fewer dollars chasing after more goods. In addition, fewer dollars means that each greenback in the monetary system will command a premium relative to prior dovish cycles.
Therefore, the present backdrop favors profitability over growth – a transition that Salesforce is attempting to undergo. Unfortunately, it lacks in the credibility department.
CRM Stock is Geared for Growth, Not Profits
While Salesforce’s leadership team should be commended at some level for recognizing the monetary transition and responding accordingly, stakeholders of CRM stock must face realities. It’s probably not going to be easy pivoting from a growth-at-all-costs mentality to one that values profitability.
For one thing, if such a change materializes, investors will likely want to enjoy the fruits of said transition in the form of dividends. Let’s be real. Prior to the pandemic-driven new normal, the main reason people acquired CRM stock was for the growth potential.
For instance, in November 2017, shares traded hands for a little over $100. Four years later, CRM stock traded for a little over $300 before the market implosion.
Should Salesforce legitimately transition to a profit-centric enterprise, there will almost surely be no way that it can generate such impressive capital gains. In lieu of this lack of upside, investors will want an alternative benefit. That means dividends.
However, the current financial profile undergirding CRM stock doesn’t really support a bottom-line approach. For instance, the underlying company’s net margin is only 1.83%. In contrast, the median for the software industry is 1.88%. Thus, Salesforce represents a middling player regarding profits. It’s neither particularly profitable nor grossly unprofitable.
Clearly, though, the company is geared toward growth. For instance, its three-year revenue growth rate stands at 16.6%, beating the industry median of 7.1%. Also, its book growth rate during the same period pings at 42.6%, better than nearly 85% of the industry.
In other words, Salesforce will probably encounter stiff challenges flipping an expansionary specialist into a value-oriented enterprise.
What is CRM Stock’s Target Price?
Turning to Wall Street, CRM stock has a Strong Buy consensus rating based on 30 Buys, six Holds, and zero Sells assigned in the past three months. The average CRM price target is $219.06, implying 41.65% upside potential.
Conclusion: Job Cuts are Not a Solution for Salesforce
At a simplistic level, cutting staff to spark increased profits seems like an intuitive proposition. Cynically, each remaining worker must generate more units of productivity than before, thus improving the efficiency of the underlying organization.
However, nothing occurs in a vacuum, especially when discussing layoffs. That’s the wider narrative that the Wharton School of the University of Pennsylvania revealed regarding the effectiveness of pink slips. While cutting headcount might generate a near-term pop, broader research suggests that such actions may be long-term detrimental to companies.
For instance, layoffs tend to reduce morale. Management isn’t dealing with widgets and gadgets but real human beings. Naturally, people tend to establish deep social connections with others in their immediate circle. Disrupting this ecosystem can create huge challenges for already-struggling businesses.
What’s more, Salesforce’s problems don’t necessarily center on its headcount. Rather, it’s that it must transition from a growth specialist into a profit-focused institution. Thus, hurting morale might be the last thing management should be doing. That’s why CRM stock poses credibility challenges for prospective investors.
