Customer relationship management giant Salesforce (NASDAQ:CRM) has experienced an impressive year-to-date rally of ~53%. However, the stock is still much lower than its all-time high of $300+ seen two years ago. On August 30, Salesforce reported an impressive earnings beat. Despite this, the stock has since declined by a few percentage points, raising the following question: is this a favorable time to invest in the stock? I’m bullish and believe it is indeed a good time to buy the stock as a long-term investment.
The stock has both bullish and bearish perspectives, and we’ll examine them to form an investment thesis.
Upbeat Q2 Results and Raised 2023 Guidance
On August 30, CRM’s adjusted earnings of $2.12 per share handily beat the consensus estimate of $1.90 per share. Also, the figure marked a substantial increase (+78.15%) from the Q2-2023 figure of $1.19 per share. It’s worth noting that CRM has consistently exceeded analysts’ consensus expectations for the past eight consecutive quarters.
Additionally, revenue grew by 11% year-over-year to reach $8.6 billion, and the company achieved a remarkable operating income margin of 31.6%, attributed to its cost-cutting measures. Notably, the company achieved its 30% margin target three quarters ahead of schedule.
On top of that, CRM raised its annual guidance, driven by recent price hikes as well as robust demand for its cloud and software offerings. The company now expects Fiscal 2024 revenue to range between $34.7 – $34.8 billion, higher than the prior forecast of $34.5-$34.7 billion as well as analysts’ expectations.
Moreover, its adjusted operating margin is projected to be 30% versus the 28% forecasted earlier. Notably, this is much higher than the 22% achieved in 2023 and the 18% reached in 2022. Also, adjusted EPS is expected to range between $8.04 and $8.06 versus the $7.41-$7.43 expected earlier.
For Q3, total revenue is expected to land between $8.70 billion and $8.72 billion, according to management, slightly higher than analysts’ expectations, while GAAP EPS is projected to fall between $1.02 and $1.03. Notably, the company also approved an increase in its share repurchase plan from $10 billion to $20 billion.
Upside Catalysts: AI Technology Monetization to Boost Revenues, Profits
AI has taken the world by storm, and leading tech companies are quickly adopting it to stay ahead of the AI curve. Like its peers, CRM is aggressively scaling up its AI investments and is set to integrate AI features into its products and services. It has entered into alliances with other tech companies like Google (NASDAQ:GOOGL) and made acquisitions like Airkit.ai, a generative AI-based customer service platform.
Over the past seven years, CRM has allocated $20 billion towards research and development to level up its product offerings and integrate the latest technologies like generative AI. It has already integrated AI features into its offerings. In March, it also launched a generative AI offering named Einstein GPT, its first-ever generative AI technology, designed to assist sales personnel, customer support services, and more. Einstein GPT is expected to add to revenues and profitability in the coming years.
To boost its AI capabilities, the company is looking to hire more than 3,000 people. This contrasts sharply with the large layoffs at the start of 2023 aimed at cost-cutting. Positively, it is indicative of robust demand and the need for additional workforce to meet it.
Earlier in August, CRM hiked prices across the majority of its core product offerings by an average of 9%, marking its first price hike in seven years. It is commendable that despite the price hike, its revenues remained unimpacted, reflecting the strong demand for its products.
Downside Catalysts: Decelerating Revenue Growth Rate & Insider Selling
Now, looking at some downside catalysts, one concern about CRM is its stagnant or decelerating revenue growth over the past few quarters, perhaps due to increased competition. 2024 revenue growth is expected to come in at 11%, much lower than the 18.4% and 24.7% recorded in 2023 and 2022, respectively.
On top of that, the departures of top management executives at CRM over the past year and insider sell transactions give a mixed picture of the stock. To my surprise, there has not been much insider buying for Salesforce stock over the past year despite the stock price dips. On the contrary, several executives have sold shares over the past few months. Notably, CEO Marc Benioff has engaged in multiple sell transactions throughout the past few weeks, some of which are shown below.
Other senior management executives that have sold the stock include President and COO Brian Millham, and co-founder and CTO Parker Harris.
Is CRM Stock a Buy, According to Analysts?
As per TipRanks, analysts overall are cautiously optimistic about Salesforce stock, giving it a Moderate Buy consensus rating based on 24 Buys, 11 Holds, and one Sell. CRM’s average price forecast of $252.88 implies 22.3% upside potential.
CRM’s Valuation is Reasonable
In terms of its valuation, Salesforce looks fairly valued. Currently, it’s trading at a forward P/E ratio of 25.8x, similar to the multiples of its peer group. Oracle (NYSE:ORCL) is trading at a forward P/E of 19.8x, while Microsoft (NASDAQ:MSFT) is trading at 49.6x.
However, its current valuation reflects a huge discount from its five-year average of 50x. I believe this attractive discount presents a great buying opportunity, given the strong growth potential for the company that lies ahead.
The Takeaway
Salesforce delivered an impressive Q2 beat in August. Admittedly, its growth has seen some moderation, hovering around 10% to 11%. However, this is likely due to cautious spending by IT clients and a weak macroeconomic outlook. Nevertheless, the company’s core fundamentals remain solid, and its valuation is reasonable.
It’s essential to recognize that the AI industry is still in its early stages. Therefore, I believe that CRM can be viewed as a long-term investment, poised to flourish once its AI-integrated platform fully translates into substantial revenue growth.
