Down 7.3% In A Day, Where Is Salesforce Stock Headed?

Salesforce stock (NYSE: CRM) has gained 4% YTD, as compared to the 6% rise in the S&P500 over the same period. That said, the stock price plummeted 7.3% yesterday, April 15th, vs a 1.2% rise in the broader index. The drop came after the reports of late-stage acquisition talks between Salesforce and data management software provider Informatica came to light. Overall, at its current price of $273 per share, CRM is trading 15% below its fair value of $323 – Trefis’ estimate for Salesforce’s valuation. 

Amid the current financial backdrop, CRM stock has shown strong gains of 20% from levels of $225 in early January 2021 to around $275 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 underperform the S&P over the next 12 months – or will it see a strong jump?

The company posted better-than-expected results in Q4 FY 2024 (FY Feb-Jan). It reported total revenues of $9.29 billion – 11% more than the year-ago period. The growth was driven by a 12% rise in subscription and support revenues, which benefited from improvement in the sales cloud, service cloud, and integration & analytics segments. Notably, Salesforce derives around 95% of its total revenues from subscription and support income. In terms of costs, the operating expenses witnessed a favorable drop in the quarter, leading to an operating margin of 17.5% vs 4.3%. Overall, the net income jumped from -$98 million to $1.45 billion.

The company’s top line grew 11% y-o-y to $34.9 billion in FY 2024, mainly due to a 12% increase in the subscription & support revenues. Further, total expenses as a % of revenues decreased in the year, improving the operating margin from 3.3% to 14.4%. Altogether, it led to a net income of $4.14 billion vs $208 million. 

Moving forward, we expect the same trend to continue in Q1. Notably, consensus estimates for first-quarter CRM revenues and earnings are $9.15 billion and $2.38 respectively. Overall, we forecast 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 4/16/2024
[2] Cumulative total returns since the end of 2016

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