Salesforce stock (NYSE:CRM) gained 4% on Oct. 18 after activist hedge fund Starboard Value announced its investment in the cloud-based software giant.
In an interview with CNBC, Starboard’s CEO Jeff Smith said that, although Salesforce’s software is critical to many sectors, the company’s stock remains cheap owing to a “subpar combination of growth and profitability.” Smith said that Starboard had amassed a sizable investment in Salesforce but did not specify the amount.
Why Did Salesforce Stock Plummet?
Salesforce’s revenue increased 24% in fiscal 2021 (which ended in January of the next calendar year) and 25% in fiscal 2022 to $26.5 billion. However, it forecasts sales to climb just 17% this year to over $31 billion. During the company’s most recent conference call, CFO Amy Weaver ascribed the slowdown to its clients’ “more careful purchasing behavior” in the face of severe macro challenges, which “resulted in extended sales cycles, extra deal approval layers, and deal compression.”
However, Salesforce forecasts its adjusted operating margin to increase to 20.4% this year, up from 18.7% in fiscal 2022 and 17.7% in fiscal 2021. Weaver credited the company’s continued growth to “incremental efficiencies throughout the business” as economies of scale took effect.
It anticipates adjusted profits per share to fall by around 1% this year as it recovers from a large investment-related gain in fiscal 2022. Without those gains, its adjusted EPS would likely increase by more than 20%.
What Next?
Salesforce’s business seems to be in good shape, but its slowing sales growth has alarmed investors who had gotten used to the company’s compound annual growth rate (CAGR) of 28% between fiscal 2012 and fiscal 2022. It confirmed its long-term sales objective of $50 billion by fiscal 2026; however, this would only need a CAGR of 17% from fiscal 2022.
Another concern is Salesforce’s reliance on large acquisitions such as Mulesoft, Tableau, and Slack to drive top-line growth, which may obscure Salesforce’s slower organic growth of core CRM (customer relationship management) services. It also faces increased competition in the CRM sector from business software behemoths such as Microsoft. Its near-term prospects are particularly bleak, as huge corporate clients cut down on expenditure in the face of current challenging macroeconomic conditions.
All of these difficulties led to a sell-off in Salesforce stock (NYSE:CRM), which was worsened by increasing interest rates, which drove investors away from higher-growth tech firms. This is where Starboard Value comes into play.
Will Salesforce Stock Recover?
Salesforce stock (NYSE:CRM) seems to be historically cheap, trading at just 25 times projected profits and 5 times next year’s sales. It should also increase in the long run as more businesses shift their CRM operations to the cloud, automate more services to save money, and depend on data-crunching visualization and analytics services to make better business choices.
As a result, I fully anticipate Salesforce stock (NYSE:CRM) to recover.
Featured Image- Megapixl @ nikkimeel
Author Okoro Chinedu 
