The spotlight on the tech sector’s robust performance has dominated the stock market narrative in 2023, underscored by the Nasdaq’s exceptional first-half showing in decades. This upward momentum has not been confined solely to the Nasdaq; the Dow Jones Industrial Average ($DOWI) has also experienced its share of the gains. While the broader Dow has seen a modest 6.3% increase this year, the shares of tech-centric constituent Salesforce Inc (NYSE:CRM) have surged by an impressive 55% during the same period.
With a market capitalization of $206 billion, CRM’s current valuation remains 50% below its historical peak. As the market’s recent high achievers begin to show signs of retracement, it raises the question of whether Salesforce can sustain its remarkable rally or if investors should consider capitalizing on gains from this cloud-based stock.
Evaluating the Prospects of Salesforce Stock: Buy, Sell, or Hold?
Salesforce stands as the global frontrunner in customer relationship management (NYSE:CRM) platforms. Its cloud-based CRM applications span diverse sectors such as sales, service, and marketing, offering seamless setup and management. This enables businesses to efficiently manage customer interactions on a unified platform accessible across various devices. Boasting over 150,000 corporate users on its platform, Salesforce has maintained its position as the premier CRM software provider worldwide for the past decade. The company has achieved a threefold increase in sales, growing from $10.5 billion in fiscal 2018 to an impressive $31.4 billion in fiscal 2023 (concluding in April).
Notably, it has emerged as the fastest-growing enterprise software company within the top 5 worldwide. In the initial quarter of fiscal 2024, Salesforce reported revenue of $8.2 billion, marking an 11% year-over-year upswing. Q1 witnessed the addition of prominent clients, including Spotify (NYSE:SPOT), Siemens (SIEGY), NASA, and the U.S. Department of Defense. The operating cash flow surged by 22% year-over-year, reaching $4.5 billion, while remaining performance obligations (RPOs) displayed an 11% increase at $46.7 billion. Salesforce’s strategic emphasis on transformation and cost optimization fueled positive outcomes in Q1, evident in its adjusted operating margin of 27.6%, reflecting a remarkable 1,000 basis points increase compared to the previous year – a noteworthy achievement, given the prevailing higher pricing environment.
Forecasting the Trajectory of CRM Stock Price and Investor Sentiment
Despite a subdued macroeconomic backdrop, Salesforce has revised its margin targets for fiscal 2024. The company anticipates reporting an operating margin of 28% in 2024, marking a 550 basis points surge from the previous year. This metric is projected to further improve to 30% in the first quarter of fiscal 2025. Salesforce’s fiscal 2024 sales forecast ranges between $34.5 billion and $34.7 billion, reflecting a solid 10% year-over-year advancement.
Additionally, the implementation of cost-saving initiatives positions Salesforce to achieve operating cash flow growth ranging between 16% and 17%, alongside a projection of capital expenditures at 2.5% of sales.
Earlier in the current year, Salesforce introduced EinsteinGPT, a groundbreaking generative AI for CRM. Unveiled at the Trailhead DX event in March, this product holds the potential to become a key revenue generator for the company. EinsteinGPT enables customers to engage with multiple expansive language models, offering toolsets for crafting generative AI applications founded on “reasonable prompts.”
Salesforce maintains an unwavering focus on restructuring efforts aimed at enhancing profit margins during a period of challenges. Analogous to previous megatrends like cloud computing, social media, and smartphones, Salesforce positions AI as the driving force behind the upcoming wave of innovation.
Setting the Target Price for Salesforce Stock
Trading at 31.5 times forward earnings and 6.5 times forward sales, Salesforce might initially appear as a high-priced investment. However, a majority of analysts remain bullish about the stock’s future potential. Out of the 26 analysts providing coverage on Salesforce stock, 22 advocates a “strong buy,” 2 recommend a “moderate buy,” 13 propose a “hold,” and 1 suggests a “strong sell.” The average price target for CRM stock stands at $232.06, representing an approximately 12% increase from its current trading value.
Buoyed by improving margins and a favorable cash flow profile, Salesforce is poised to reinvest in growth, pursue value-enhancing acquisitions, and augment shareholder value through share buybacks. Since August 2023, the company has repurchased shares worth $6 billion, equivalent to 38 million shares. Q1 alone witnessed a return of $2.1 billion to investors.
Conclusion
Salesforce enjoys robust customer loyalty and benefits from a wide economic moat. Its expanding array of products and solutions, coupled with improving financials and dominant market positioning, solidifies its status as a premier investment choice for long-term investors, even considering its relatively higher valuation and the impressive gains achieved thus far in 2023.
Featured Image: Freepik
Author Faith Yakubu 
