Up 69% In The Last Twelve Months, What To Expect From Salesforce Stock?

Salesforce stock (NYSE: CRM) has gained 20% YTD, as compared to the 8% rise in the S&P500 over the same period. Further, at its current price of $315 per share, it is trading 3% below its fair value of $323 – Trefis’ estimate for Salesforce’s valuation. 

Amid the current financial backdrop, CRM stock has shown strong gains of 40% from levels of $225 in early January 2021 to around $315 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in CRM stock has been far from consistent. Returns for the stock were 14% in 2021, -48% in 2022, and 98% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CRM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CRM face a similar situation as it did in 2021 and 2022 and underperformed the S&P over the next 12 months – or will it see a strong jump?

The company outperformed the street estimates in Q4 FY 2024 (FY Feb-Jan), the fourth earnings beat in a row. It posted total revenues of $9.29 billion – up 11% y-o-y, primarily driven by a 12% increase in subscription and support revenues, somewhat offset by a 9% drop in the professional services segment. Notably, the subscription and support segment, which derives close to 95% of the top line, mainly benefited from growth in sales cloud, service cloud, and integration & analytics sub-categories. On the cost front, the operating margin improved from 4.3% to 17.5% due to a 7% decrease in operating expenses. Further, the loss on strategic investment was reduced from $314 million to $35 million. Overall, the net income improved from -$98 million to $1.45 billion.

The company’s top line grew 11% y-o-y to $34.9 billion in FY 2024. It was primarily because of a 12% rise in the subscription & support revenues. In addition, both the cost of revenues and operating expenses as a % of revenues witnessed a favorable drop. It resulted in an operating margin of 14.4% vs 3.3%. It resulted in a net income of $4.14 billion, as compared to the figure of $208 million in the year-ago period. 

CRM announced a restructuring plan at the start of 2023 intended to drive operational efficiency. The company has substantially completed the plan by Q4 and is committed to continuing its efforts over the subsequent quarters. We expect this move to benefit the bottom line. Further, continued business spending on digital transformation projects and Salesforce’s leadership position in the customer-relationship management (CRM) software space is a big plus for its revenue growth. We estimate Salesforce’s revenues to be around $38 billion in FY2025. Additionally, CRM’s revenue per share (RPS) is likely to increase to $37.62. This coupled with a P/S of multiple of 8.6x will lead to a valuation of $323. 

[1] Returns as of 3/5/2024
[2] Cumulative total returns since the end of 2016

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