Salesforce (CRM) stock slumped after its Q1 earnings. Given the recent negative revenue and earnings revisions, there’s certainly scope for the company to outperform in Q2 – results are expected post-market on August 28. However, I don’t think Salesforce stock is a buy before earnings, noting the ‘not bad’ valuation metrics, slowing revenue momentum, and the share price target.
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While there could be an upside if Q2 earnings impress, there are investments with less risk attached. As such, and despite noting some reasons for optimism, I’m neutral on the stock.
Salesforce Revenue Growth Slows
As a reminder, Salesforce is a leading provider of customer relationship management (CRM) software — hence the name of its ticker — designed to help businesses manage their sales, marketing, and customer service operations more effectively.
Let’s start with the elephant in the room and the prime reason for my neutral position – Salesforce’s slowing growth.
Historically, the San Francisco company has posted an annual revenue growth rate exceeding 18% over the past decade. However, management recently indicated that it had revised its full-year growth forecast to 8-9% for fiscal year 2025. This reflects a cautious buying environment and elongated deal cycles among customers.
“We continue to see the measured buying behavior similar to what we experienced over the past two years, with the exception of Q4, where we saw stronger bookings. The momentum we saw in Q4 moderated in Q1, and we saw elongated deal cycles, deal compression, and high levels of budget scrutiny,” Salesforce president Brian Millham said after Q1.
Investors’ Reaction
Perhaps unsurprisingly, the stock slumped following Q1 earnings. Investors reacted negatively to the lowered growth expectations and raised concerns about Salesforce’s ability to maintain its valuation, making it vulnerable to market fluctuations. However, it’s worth noting that management did raise its non-GAAP earnings per share (EPS) forecast.
It’s also worth noting that this revenue downgrade comes as many technology companies are experiencing artificial intelligence (AI) tailwinds, typically leading to stronger growth. While management is excited by the prospects of AI, it’s not having a clear impact on topline growth yet.
Low Expectations For Q2
Due to its recent struggles, expectations for the second quarter have been lowered. In Q1 of 2025, Salesforce beat earnings estimates by $0.07 on an actualized basis. However, the market honed in on the revenue miss of $13.4 million, reflecting the concerns above.
Analysts have responded by reducing their Q2 forecasts, with 33 downward revenue revisions and just one upward revision. Looking closer at the figures, the consensus suggests 7.3% year-over-year revenue growth for Q2, 8% for Q3, and 8.2% for Q4.
However, not all are painted in dark colors. The earnings forecast is more positive, reflecting comments from Salesforce management in the Q1 earnings call. EPS is expected to grow by 11.1% year-over-year in Q2, 15% in Q3 and 16.6% in Q4. This likely reflects stronger cost controls.
Reasons For Optimism on Salesforce
After digesting the company’s poor data and low estimates, I think there are several reasons for optimism. First among them is these lower expectations. After disappointing Q1 results, analysts have lowered their forecasts, potentially setting the stage for a revenue and earnings beat.
Moreover, AI could start to make a difference. The company’s focus on AI innovations, particularly through its Salesforce Einstein platform, could drive growth and enhance customer engagement. Additionally, the recent acquisitions of firms like Spiff and Airkit.ai should contribute positively to its revenue.
Furthermore, the company’s cost restructuring efforts have already shown positive results, with a significant improvement in operating margins in Q1. While this is already reflected in the earnings forecast, more improvements could come.
Is Salesforce Stock Good Value?
Moving on to value, Salesforce doesn’t trade with much of a premium to the S&P 500 at 26.7x forward earnings. With earnings expected to grow at a CAGR of 18.5% over the medium term, the result is a price-to-earnings-to-growth (PEG) ratio of 1.45.
Typically, a PEG ratio below one indicates good value. However, with its longer-term growth horizons, the tech sector has rewritten the metric. I’d suggest a PEG ratio of 1.45 isn’t a bad value, but it’s also not overly attractive. Particularly when considering its current burdens.
Is Salesforce A Buy According To Analysts?
On TipRanks, CRM stock is rated a Moderate Buy based on 28 Buys, 10 Holds, and one Sell rating assigned by analysts in the past three months. The average Salesforce stock price target is $296.74, implying an 12.99% upside potential.
The Bottom Line On Salesforce Stock
In short, Salesforce trades at a small-to-moderate discount to its share price target, its valuation metrics don’t scream “buy,” and revenue momentum is slowing. Collectively, none of these factors make me want to buy the stock.
Moreover, buying before earnings can be extremely risky, opening my investment up to the potential for extreme volatility. For me, this investment simply holds too much risk, and I’d rather take a closer look at the earnings report and assess the development of any trends. To conclude, I am neutral on CRM stock and remain on the sidelines for now.
