Two influential executives recently left Salesforce (NYSE:CRM). Even though Marc Benioff and Co. had a strong quarter that showed how strong the business is, I argue in this article that it’s best to refrain from investing in this company.
Q3 Results in a Nutshell
Salesforce had a good third quarter, with sales of $7.84 billion, which was up 14% from the same time last year and $3.4 million more than analysts expected. Non-GAAP earnings per share of $1.40 were $0.18 higher than analysts had expected. The company did not only keep its revenue forecast for FY23 the same, but it also raised its Q3 operating margin forecast by 200 basis points. The only problem was that guidance for FY24 was put off until the fourth quarter because of a “very uncertain environment.”
Key Management Exits Put Slack in Limbo
However, CRM’s third-quarter earnings report was most notable for Bret Taylor’s announcement that he was leaving his job as co-CEO of Salesforce to return to his “entrepreneurial roots.” He was named co-CEO with the charismatic founder Marc Benioff just over a year ago.
Mr. Taylor’s departure is a huge loss for the company, especially since he was the driving force behind CRM’s biggest acquisition to date, the nearly $28 billion purchase of workplace communications company Slack. Also, he just quit as Chairman of Twitter after Elon Musk bought the company. His departure, which is said to be because of a disagreement with Mr. Benioff, comes at a time when investors were finally looking forward to Mr. Taylor putting all of his energy into running Salesforce.
Even worse, Slack co-founder Stewart Butterfield announced that he was leaving the company, but it doesn’t look like his leaving had anything to do with Mr. Taylor’s leaving and was just a case of “weird timing.”
Even if the company’s founder is still in charge, management changes should continue the company pursuing its long-term goals. But the fact that we are talking about the departure of two people who helped get the next growth lever for the company does not make this a small event. To put things in perspective, Slack grew by 46% from the same time last year to the same time this year. Since management now sees Slack as an essential part of the company’s Customer 360 platform, these key management departures should make investors doubt the platform’s future growth.
Strong RPOs and ARRs show that the business is still strong at its core, at least for now.
If you look at the details of the company’s third-quarter results, you’ll see that the business is still strong at its core. Multi-cloud adoption, when a customer uses five or more clouds, for example, has been steadily growing, with Annual Recurring Revenues (ARRs) increasing by more than 20% year over year.
In the third quarter, the revenue attrition rate was less than 7.5%, which shows that the company’s ability to make money has mostly stayed the same despite the tough macro headwinds. Also, Remaining Performance Obligations (RPOs) went up by 10% year over year to $40 billion, while Current RPOs (CRPOs), which are RPOs for the next twelve months, went up by 11% year over year to $20.9 billion.
Lastly, operating margins of 22.7% show that the company is still moving toward making money. The company spent $1.7 billion of the $10 billion it was allowed to spend on buying back shares in the third quarter, keeping the focus on giving cash back to shareholders.
In an uncertain environment, when two of the company’s best generals leave, it’s the last thing the company needs: more uncertainty. But evidence from Q3 shows that CRM’s core strength is still there for the time being.
Refinitiv says that CRM is trading at a forward P/E of 24x, much lower than its historical forward P/E multiple of 57x. Also, compared to its competitors, the company is relatively inexpensive. For example, the forward P/E ratio for Snowflake is 293x. So, I’ve assumed that the company’s forward P/E is 24x, especially given how strong the company is.
The company expects its earnings per share for FY23 to be between $4.92 and $4.94. CRM is trading at a forward PEG ratio of 1.56, which means that earnings are expected to grow by almost 15%. If the lowest estimate for EPS for FY23 is $4.92, this means that EPS for FY24 will be $5.66.
So, a forward P/E ratio of 24x gives a price target of $136, close to where Salesforce stock is currently trading. Because of this, there is now little to no long-term upside at current levels.
Bottom Line
Right now, there aren’t that many reasons to get excited about CRM. Yes, the business is still strong at its core, but I don’t think it will be able to show strong growth next year because of the big picture.
Even worse, Mr. Taylor and Mr. Butterfield’s departures are a real loss for the company and couldn’t have happened at a worse time since they created Slack, the company’s most recent growth engine.
In general, there are macroeconomic uncertainties and uncertainties caused by the departure of key management. Even the charismatic Marc Benioff cannot solve these problems. If you need to return to the stock, it’s best to wait until you have more information. Until then, investors would do better to stay away from Salesforce stock.
Featured Image – Pexels © Lex Photography
