Salesforce’s (NYSE:CRM) FQ2’23 earnings report frightened the market. CRM surrendered all of its August gains as it approached its mid-July lows. However, we saw nothing out of the ordinary in its earnings report, as we predicted in our pre-results update that most of its near-term issues had been factored in. As a result, we see the recent sharp decline as a chance for the market to shake out some weak holdings while also providing another excellent opportunity for patient investors to increase their exposure.
Salesforce is the industry-leading CRM structurally, extending more into its industry verticals with its 360 approaches. As a result, we are confident in the company’s strong profitability profile, as management reaffirmed its non-GAAP operating profit margin projection. Despite the increasing macroeconomic and currency effect, we believe the difficulties noted in its results comments are temporary.
As a result, we retain our Buy recommendation and advise investors to take advantage of the current drop to acquire exposure.
Salesforce’s Broad Slowdown Was Expected
We indicated in our pre-earnings statement that enterprise SaaS providers have been under pressure as the macroeconomic environment has deteriorated. As a result, we’re not shocked that Salesforce hinted at longer sales processes, compounded by more transaction approval layers and deal value compression.
Furthermore, the weakening seen in small and medium-sized businesses (SMBs) via Slack supported the recessionary theme, as the slowdown was widespread. As the market leader, Salesforce will not be immune to the macro influence. As a result, while the momentum in its core Sales Cloud remains strong, growth slowed further to 14.8% year on year in Q2, down from 17.6% in Q1. Notably, it also suggested a break from the preceding four quarters’ reacceleration in growth.
Furthermore, the momentum in its Service Cloud has continued to wane, as it reported 14.3% YoY growth for the fifth consecutive quarter. It also fell short of Q1’s 16.9% increase, implying that Salesforce saw a broad-based slowdown. To make matters worse, the company’s Marketing and Commerce Cloud continued to suffer post-pandemic normalization, with a 17.4% revenue increase.
As a result, Salesforce investors are right to be concerned about whether these tendencies indicate anything more nefarious. Questions abound about whether Salesforce’s underlying growth drivers would be meaningfully impacted in the coming years, even as it navigates some temporary near-term hurdles.
However, we are confident that Salesforce’s competitive moats created by its 360 approach and industry verticals cloud will provide a significant edge in securing its medium-term revenue roadmap of $50 billion by FY26. Management emphasized that the company’s position as the top CRM cloud has extended significantly to multi-cloud and numerous industrial verticals, giving tremendous value to stimulate client adoption and confidence.
Our client’s top priority is digital transformation, and digital transformation begins and ends with the customer. Our results reflect our business model’s tenacity and our approach’s effectiveness. Our Customer 360 product set is the market leader and industry standard. Because our clients are more concerned with time to value and lowering deployment costs, our 12 industrial clouds [increased] faster than our line of business clouds. In this more measured buying climate, the out-of-the-box industry processes we’ve incorporated into our industry clouds provide a compelling value proposition.
Strong Profitability Profile Should Support CRM’s Battered Valuation
Furthermore, the consensus projections (which are highly positive) indicate that Salesforce’s profitability profile is expected to improve even more when its growth slows. We are optimistic about management’s ability to sustain its non-GAAP operating margin estimate of 20.4%, indicating the inherent leverage in its underlying business.
Furthermore, we are convinced that the FX headwind built into its full-year projection will reverse since we believe the dollar index’s spike is unsustainable. As a result, we believe CRM will continue to find strong support near its July lows, where it last traded two standard deviations below its 10Y NTM EBITDA multiples mean.
When combined with the company’s strong earnings projection, we believe that the negative volatility should be minimal compared to the possibility for a medium-term re-rating as those transitory obstacles fade.
Is CRM Stock A Buy, Sell, Or Hold?
CRM has given up all of its August gains, with the market sending it plummeting close to its near-term support ($155). However, we believe that its near-term support will stay firm, with the underlying price action positive as an accumulation phase. As a result, investors should not be concerned about the downturn. Instead, they should view it as another excellent chance to increase exposure as the market shakes out some weak holding who couldn’t withstand the short-term volatility.
As a result, we continue our Buy recommendation for CRM.
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