Salesforce's (CRM -0.10%) stock rallied 9% during after hours trading on May 31 following its first-quarter earnings report. The cloud-based software company's revenue rose 24% year over year (26% in constant-currency terms) to $7.41 billion, which beat analyst estimates by $30 million. Adjusted net income declined 14% to $982 million, or $0.98 per share, but still cleared the consensus forecast by $0.04.
Do those better-than-expected numbers indicate it's finally time to invest in Salesforce stock, which remains down nearly 40% this year? Let's examine its growth rates and valuations to find out.
Image source: Getty Images.
How fast are Salesforce's core businesses growing?
During the first quarter, Salesforce generated:
- 24% of its subscription and support revenue from its sales platform
- 26% from its service segment
- 21% from its platform and other segment (which includes its app development platform Lightning and Slack)
- 14% from its data segment (which houses Tableau and Mulesoft)
- 16% from its marketing and commerce segment
Here's how those five core businesses fared during the first quarter, relative to the previous two years:
|
Revenue Growth (YOY) |
FY 2021 |
FY 2022 |
Q1 2023 |
|---|---|---|---|
|
Sales |
13% |
15% |
18% |
|
Service |
20% |
20% |
17% |
|
Platform & Other |
40% |
36% |
55% |
|
Data |
75% |
25% |
22% |
|
Marketing & Commerce |
25% |
28% |
15% |
|
Total Subscription & Support |
25% |
23% |
24% |
Data source: Salesforce. Chart by author. YOY = Year over year.
Salesforce expects its revenue to rise 21% year over year in the second quarter and 20% for the full year. Both those estimates slightly missed analyst expectations. The company also reduced its full-year guidance by about $300 million to account for foreign-exchange headwinds.
However, the market's underlying demand for its services is still strong. Its remaining performance obligations (RPO) rose 21% year over year (24% in constant currency terms) to $21.5 billion during the quarter, and it didn't alter its long-term goal of generating over $50 billion in annual revenue by fiscal 2026. Therefore, Salesforce can still likely grow its annual revenue at a compound annual growth rate (CAGR) of at least 17% from fiscal 2022 to fiscal 2026.
A brighter outlook for operating margins
Salesforce's operating margins declined sharply by both generally accepted accounting principles (GAAP) and non-GAAP metrics during the first quarter. The compression was largely due to its integration of Slack and other recent acquisitions -- but its operating margins will likely expand again later this year.
|
Period |
FY 2021 |
FY 2022 |
Q1 2023 |
|---|---|---|---|
|
Operating Margin (GAAP) |
2.1% |
2.1% |
0.3% |
|
Operating Margin (Non-GAAP) |
17.7% |
18.7% |
17.6% |
Data source: Salesforce. Chart by author.
At the end of fiscal 2022, Salesforce predicted its operating margins would rise to about 3.6% on a GAAP basis and 20% on a non-GAAP basis in fiscal 2023. But in the first quarter, it raised its GAAP operating margin guidance to 3.8% and its non-GAAP operating margin guidance to 20.4% -- even after absorbing a 100-150 basis-point impact from its recent acquisitions.
During the conference call, CFO Amy Weaver attributed that brighter outlook to "a continued focus on disciplined decision-making across the organization," and said the company was "committed to continuing to improve profitability over the long term."
Salesforce's guidance for a 31%-32% non-GAAP earnings per share (EPS) decline in the second quarter missed analyst expectations, but it raised its full-year guidance from a 3% decline to 0%-1% growth. Excluding its $0.93 per-share benefit from strategic investments in fiscal 2022 (which mostly won't be repeated this year), its full-year guidance would actually imply more than 20% growth.
The stock is still reasonably valued
Salesforce's near-term growth looks a bit messy, due to its acquisitions and currency headwinds, but it remains the market leader in cloud-based customer relationship management (CRM) services. Its expansion into adjacent markets, like e-commerce and marketing, should also increase the stickiness of its subscription-based ecosystem. Therefore, I believe Salesforce still has a clear path toward generating double-digit revenue and earnings growth over the long term.
At $175 a share, Salesforce trades at about 37 times its non-GAAP EPS forecast for fiscal 2023 and five times this year's sales. Those valuations might seem a bit high, but they're reasonable for the cloud CRM market.
For reference, Veeva Systems, which provides CRM services to life science companies, also trades at 38 times forward earnings and 12 times this year's sales -- but it faces a much tougher near-term slowdown than Salesforce. Zendesk, which targets smaller businesses with its simpler CRM and online ticketing services, trades at nearly 140 times forward earnings and seven times this year's sales.
Is it the right time to buy Salesforce?
Salesforce stock could remain under pressure this year as rising interest rates keep investors away from higher-growth tech stocks. However, it's still a solid investment on the digitization of large businesses and the secular growth of the cloud software market. Long-term investors can nibble on Salesforce stock right now but shouldn't expect any massive near-term gains.
