Case Study: What Credible analysts are saying on Salesforce (CRM) stock
Key Points
Salesforce shares fell by 6.7% this week. On a year-to-date basis, CRM is now down by 43.4%. This compares poorly to the S&P 500, which is down by approximately 15.1% during 2022 thus far
Slowing growth, deteriorating profit margins, and a poor macro sentiment surrounding high premium growth stocks continues to plague CRM shares.
Salesforce posted Q3 earnings this week, beating Wall Street’s expectations on the top and bottom lines. CRM reported sales of $7.84 billion, beating Wall Street estimates by 10 million, representing 14.3% year-over-year growth. The company’s non-GAAP EPS was $1.40, $0.18 ahead of Wall Street consensus. However, poor Q4 guidance, along with news that CRM’s co-CEO is leaving the company, resulted in a sell-off.
75% of recent articles published by credible authors focused on CRM shares offer a “Bullish” bias. 11 out of the 13 credible credible Wall Street analysts who cover Salesforce believe shares are likely to rise in value. The average price target being applied to Salesforce by these credible analysts is $216.38, which implies upside potential of approximately 49.7% relative to Salesforce's current share price of $144.56.
Gen Alpha, a 5-star rated Nobias author, notes that Salesforce is a “a virtual "cash minting machine", as its positioning enables it to charge premium prices for its services, giving way to strong margins.”
Vladimir Dimitrov, CFA, a Nobias 4-star rated author said, “Investors looking for a low entry point should be careful of further downside, even as valuation has already cooled off in 2022.”
Performance
Event & Impact
Noteworthy News:
Nobias insights
Bullish Take:
Bearish Take:
Salesforce (CRM) shares have performed poorly throughout 2022, falling by 43.4%. For comparison’s sake, the S&P 500 is now down by 15.1% on the year while the tech-heavy Nasdaq is down by 27.6%. This relative underperformance is rare for CRM investors; over the last 5 and 10-year periods, the stock has beaten the market by a wide margin.
The S&P 500 is up by 187.1% during the last decade. Salesforce, on the other hand, has seen its share price rise by 269% during this same period. Salesforce reported its third quarter earnings this week, yet the results did not change the negative sentiment surrounding CRM shares. Salesforce dropped another 6.7% this week due to disappointing guidance.
During Q3, CRM reported sales of 7.84 billion, beating Wall Street estimates by 10 million, representing 14.3% year-over-year growth. The company’s non-GAAP EPS was $1.40, $0.18 ahead of Wall Street consensus. However, despite the top and bottom-line beat during the third quarter, it appears that investors were unhappy with the forward guidance provided by management.
CRM Nov 2022
Seeking Alpha news editor Pranav Ghumatkar highlighted CRM’s forward guidance in a report this week, stating: “Q4: Revenue Guidance of $7.932 Billion to $8.032 Billion vs. consensus of $8.04B, up 8% to 10% Y/Y, 12% to 13% CC; Non-GAAP earnings per share $1.35 - $1.37 vs. consensus of $1.35.
2023 Outlook: Revenue Guidance of $30.9 Billion to $31.0 Billion vs. consensus of $31.01B, up 17% Y/Y, 20% CC; GAAP Operating Margin Guidance of ~3.8% and Non-GAAP Operating Margin Guidance of ~20.7%; Operating Cash Flow Guidance of ~16% growth Y/Y; Non-GAAP earnings per share $4.92 - $4.94 vs. consensus of $4.73.
Bearish Nobias credible authors:
Regarding these results, Vladimir Dimitrov, CFA, a Nobias 4-star rated author, published a bearish post-earnings article regarding Salesforce at Seeking Alpha this week. He began by saying, “December 1 was quite painful for Salesforce shareholders as shares fell by more than 8% during the trading session.”
Dimitrov highlighted unexpected news announced alongside the quarterly report that Salesforce’s relatively new co-CEO, Bret Taylor, is leaving the company and noted that CRM’s weak share price is likely going to make it difficult for the company to attract top talent because of its stock-based compensation policies. He wrote, “One major pillar of attracting and retaining talent for tech companies has been the amount of share-based compensation.”
Dimitrov noted that Salesforce takes its share-based compensation to “extreme levels” and continued, “The recent downturn in both equity and fixed income markets has the potential to make Salesforce's growth strategy obsolete. The reason why I am saying that is because CRM relies heavily on growing through ever-larger acquisitions, and it needs this topline growth to support its sky-high valuation, which in turn is key for the company's stock-based compensation.”
Regarding this M&A fueled growth cycle, he said, “Although topline growth remains high, without the boost of a new large acquisition, CRM's growth story begins to fade.” “Even more worrisome,” Dimitrov said, “is the pressure for the company to finally achieve acceptable levels of profitability.” He went on to quote Marc Benioff, Chair & Co-Chief Executive Officer of Salesforce, who highlighted the company’s bottom-line goals during its recent earnings report.
Benioff said, “We're raising our fiscal year 2023 non-GAAP operating margin guidance from 20.4% to 20.7%, an expansion of 200 basis points year-over-year, and I expect a lot more, especially with this increased focus we have on expanding our operating margin.” Yet, Dimitrov notes that this was “not enough to appease investors.”
Furthermore, when looking through CRM’s Q3 report, Dimitrov said, “The cash flow statement of Salesforce is also full of red flags for such a large enterprise that is currently a leader in the highly attractive software space.”
“To begin with,” he continued, “the already low operating profitability results in a razor-thin net income figure due to fading gains on strategic investments.” “The bigger issue,” he wrote, “is the skyrocketing amount of stock-based compensation, which is already more than half of the company's cash flow from operations for the past 12 months.”
While stock-based compensation may be necessary for Salesforce to attract top talent, it’s not good for shareholders. Stock-based compensation dilutes CRM’s outstanding share count and therefore, per-share metrics, such as earnings-per-share, are lowered as share counts move high.
Dimitrov highlighted this negative trend, stating that the company’s “$1,677m spend on share repurchases over the past fiscal year was not enough to fully offset dilution.” Ultimately, he concluded, “Even though Salesforce has created a very strong ecosystem of services, the means to achieve that are flawed.”
Due to issues with stock-based compensation and deteriorating margins, Dimitrov ended his report by saying, “Investors looking for a low entry point should be careful of further downside, even as valuation has already cooled off in 2022.”
Bullish Nobias credible authors:
Gen Alpha, a Nobias 5-star rated author, offered a more bullish take on the company after its recent earnings results. The author began by highlighting recent share price weakness, stating, “CRM stock is now trading at close to half of its 52-week high, losing well over $100 billion in equity market cap over the past 12 months.”
However, they remain very bullish on the company’s business operations. Regarding Salesforce’s business, Gen Alpha, said “Salesforce's flagship product, Sales Cloud, has been helping businesses of all sizes to manage their customers better for many years. It offers powerful features that enable users to track customer interactions and insights, create targeted campaigns, and close deals faster.” They continued, “Along with its CRM offering, Salesforce also provides an array of cloud-based services for enterprise apps such as marketing automation, analytics, customer service, and ecommerce.”
Furthermore, they stated, “Salesforce has also developed a suite of mobile apps that enable users to access their data on the go.”,“This makes it easier for businesses to stay connected with their customers wherever they may be,” Gen Alpha wrote. They believe that Salesforce has a clear leadership position in its industry and highlighted that by stating, ”This is reflected by industry analyst IDC recently ranking Salesforce number one in CRM for the ninth year in a row.”
Overall, Gel Alpha concludes, “This makes Salesforce a virtual "cash minting machine", as its positioning enables it to charge premium prices for its services, giving way to strong margins.” But, they also acknowledged risks. “Founder dependency” is a risk that Gen Alpha is concerned about with Brett Taylor leaving the company. They wrote, “While founder Marc Benioff is undoubtedly a visionary, it remains to be seen whether if another person is worthy of carrying forward the baton.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Also, like Dimitrov, Gen Alpha is concerned about the company’s buyback plans. Gen Alpha noted that CRM announced a new $10 billion buyback program during the quarterly report, but said, “While buybacks are an efficient return of capital from a tax perspective, I simply don't see how it would be very accretive to shareholders at the current price of $144.56 with a forward PE of 30. This equates to a low 3% earnings yield on every dollar spent on share repurchases, and implies that management is short of growth opportunities with which to deploy capital.”
But overall, the author remains bullish on the stock. “Lastly,” they wrote, “I view Salesforce as being undervalued at the current price of $145 with a forward PE of 30.” Gen Alpha concluded, “I would find Salesforce to be more attractive at a 25x PE, which translates to a price of $123. This price would bake in a more tempered level of growth going forward.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, the vast majority of credible authors and analysts that the Nobias algorithm tracks express bullish sentiment towards CRM shares. 75% of recent articles published by credible authors have included a “Bullish” bias. 11 out of the 13 credible Wall Street analysts that Nobias tracks who cover CRM shares believe that the stock is likely to increase in value. Right now CRM shares trade for $144.56. The average price target being applied to CRM by the credible analyst community is $216.38. Therefore, credible analysts see upside potential of approximately 49.7%.
Disclosure: Nicholas Ward is long CRM. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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