Salesforce: Sizeable Earnings Push Potentially on the Horizon

Shares of cloud pioneer Salesforce (CRM) has shed around a third of its value, thanks in part to the broader weakness in high-multiple tech stocks.

Few companies in the big-tech cohort have been spared from this latest sell-off. While shares of Salesforce are undoubtedly expensive from a price-to-earnings (P/E) perspective, I still think that the stock is now trading at a lofty discount relative to the magnitude of growth and talents of management.

Salesforce Stock Punches Front-Row Seat to Digital Transformation Trend

The founder-led company could take the enterprise software space by storm as hybrid work continues to thrive even once the pandemic ends.

Over the years, the firm has made many intelligent investments to bolster its portfolio. Marc Benioff and his team have an eye for where the puck is headed next in the enterprise software space. He’s a big believer in the digital transformation trend and the future of work. That said, investors and analysts have punished the company for acquiring Slack Technologies in the back half of 2020.

Could it be that Benioff got a bit too excited at a time when valuations were across the board were stretched in the tech scene? Perhaps. However, Salesforce stock has since been punished very severely.

With the stock in the midst of its fourth bear market in under four years, investors have the right to be concerned.

As with most past bear market moves, though, CRM stock is likely to prove that it’s a compelling dip buy here, as investors begin to appreciate the margin expansion opportunity at hand.

Based on earnings, CRM stock is expensive north of 113 times trailing earnings. That said, the company has the means to expand upon its margins, and the result could be some quicker-than-expected earnings multiple compression. Despite Benioff’s prior itch to make acquisitions in the red-hot tech space, I remain bullish on Salesforce stock.

Salesforce Is Evolving to Become a Worthy Microsoft Challenger

It’s really hard to challenge the likes of Microsoft (MSFT), one of the original tech titans.

After years of intriguing acquisitions and investments, though, Salesforce has emerged as a top contender with one of the most enviable enterprise software suites out there built organically and via acquisition. Salesforce’s acquisitions have not come cheap, and future M&A deals can continue to act as an overhang on the stock.

Benioff just loves making deals. His enthusiasm over deals and emerging technologies is almost palpable. While he runs the risk of overpaying, I do think that it’s far harder to gauge potential long-term synergies, given how difficult it is to value rapidly-growing companies in the tech world.

With the broader tech sector sinking lower, it’s becoming increasingly evident that Salesforce probably should have waited before scooping up Slack. Still, I do think that in five years that the expensive deal will be worthwhile. The company’s satisfied customers could prove to be an easy upsell. The company does specialize in sales software, after all.

Further, Benioff seems to be looking way out into the future. He wants to have the very best products as a part of the Salesforce suite. Recent acquisitions are arguably best-in-class products that may be worth more of a premium than Salesforce paid.

Wall Street’s Take

Turning to Wall Street, CRM stock comes in as a Strong Buy. Out of 27 analyst ratings, there are 23 Buy recommendations and four Hold recommendations.

As for price targets, the average Salesforce price target is $333.17, implying an upside potential of 62.4%. Analyst price targets range from a low of $225.00 per share to a high of $375.00 per share.

The Bottom Line on CRM Stock

Salesforce certainly has an opportunity to integrate Slack alongside cloud offerings to create a combo that could become a force to be reckoned with in the enterprise software space.

For now, investors don’t like the name. It seems expensive, but with operating margins on the right track and the ability to sustain revenues in the 20-25% range, I do view Salesforce as a company with plans to become very profitable over the next five years and beyond. For that reason, I think the damage done is a tad overblown.

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