4 Red Flags for Salesforce's Future

Salesforce (CRM -1.59%) is often considered a resilient blue-chip tech stock. It owns the largest cloud-based customer relationship management (CRM) platform in the world, and it leverages that dominance to cross-sell additional cloud services for adjacent markets.

Salesforce believes it can nearly double its annual revenue to $50 billion by fiscal 2026, which ends in January of that year. That rosy forecast implies its annual revenue will rise at a compound annual growth rate of 17.3% between fiscal 2022 and 2026 -- which is an impressive growth rate for a stock that trades at just seven times this year's sales.

I personally own shares of Salesforce, and I believe this cloud king still has a bright future. However, investors should be aware of the challenges that could throttle its near-term growth. So today, I'll take a closer look at four red flags for Salesforce -- and what they might mean for the company.

Image source: Getty Images.

1. A series of price target cuts

Several prominent analysts recently slashed their price targets for Salesforce. In late January, Deutsche Bank analyst Brad Zelnick reduced his price target from $360 to $300 but maintained a buy rating.

Earlier this month, Loop Capital analyst Yun Kim reduced his firm's price target from $275 to $225 and maintained a hold rating. Mizuho analyst Gregg Moskowitz also reduced his price target from $350 to $295 while reiterating his firm's buy rating on the stock. All of these analysts cited valuation concerns amid rising interest rates in their price target reductions.

Investors should take these analysts' estimates with a grain of salt since they tend to cut their price targets -- which still represent significant premiums to Salesforce's current price -- only after a stock has declined. Nonetheless, aggressive rate hikes and geopolitical tensions could certainly limit Salesforce's appeal as investors pivot toward more defensive plays.

2. Microsoft's growth in the CRM market

Salesforce controlled 23.9% of the global CRM market in the first half of 2021, according to IDC. Oracle ranked second with a 5.5% share, while Microsoft (MSFT -1.84%) and SAP tied for third place with 5% each.

Salesforce's lead is impressive, but a look at the growth of Microsoft's Dynamics in the CRM market reveals a troubling trend:

Data source: Microsoft. YOY = year over year. 

Dynamics 365, which runs as a subscription-based cloud service, is growing more than twice as rapidly as Salesforce's CRM business. That weed-like growth -- which is supported by Microsoft's sprawling ecosystem of cloud and enterprise software -- should alarm Salesforce's investors.

3. Rumored NFT plans

Salesforce has increasingly relied on big acquisitions, such as Mulesoft and Slack, to expand its ecosystem and boost its revenue. But as it grows beyond its core CRM platform, it also exposes itself to tougher competition from Microsoft, Adobe, and other cloud giants. The bears argue that inorganic expansion gradually "diworsifies" its business, meaning diversification that actually worsens a company by adding more risk without increasing returns.

Salesforce's rumored development of a dedicated cloud platform for non-fungible tokens (NFTs), which was leaked through media reports and internal letters, supports that bearish argument. Hundreds of Salesforce employees have reportedly revolted against those plans, according to Thomson Reuters Foundation News, citing concerns about the long-term environmental impacts and the risk of fraudulent transactions.

It's unclear if Salesforce will actually launch an NFT platform, especially after the recent phishing attack against the top NFT marketplace OpenSea, but its existence raises troubling questions about its long-term growth strategies.

4. A lack of insider confidence

Lastly, Salesforce's insiders sold more than 10 times as many shares as they bought over the past 12 months. Over the past three months, those insiders sold a whopping 26 times as many shares as they purchased.

That lack of insider confidence, which coincides with the stock's decline of more than 34% over the past three months, raises a bright red flag.

Should investors ignore these warning signs?

I'm not paying much attention to Wall Street's price target cuts, but I believe that Microsoft's growth in the CRM market, Salesforce's sudden interest in NFTs, and its insider sales are all worth tracking.

These red flags haven't altered my long-term opinion about Salesforce yet, and I still plan to hold the stock for at least a few more years. However, they could affect my willingness to accumulate more shares -- especially as macro headwinds spark an ongoing retreat from higher-growth tech stocks.