Where Will Salesforce Stock Be in 1 Year?

Salesforce's (CRM -1.10%) stock slid 7% during the after hours session on Aug. 24 following the release of its second-quarter report. The cloud-based software company's revenue rose 22% year-over-year (26% in constant currency terms) to $7.72 billion, which beat analysts' estimates by $20 million. Its adjusted net income fell 15% to $1.19 billion, or $1.19 per share, but still cleared the consensus forecast by $0.19.

However, Salesforce provided a weaker-than-expected forecast for the rest of the year. It expects its revenue to rise 14% year-over-year in the third quarter and to increase 17% for the full year. Analysts had been anticipating 18% growth in the third quarter and 20% growth for the full year.

Image source: Getty Images.

Does that slowdown indicate that darker days are ahead for this cloud software giant? Let's review Salesforce's growth rates, its upcoming catalysts and challenges, and its valuations to see where its stock could be headed over the next 12 months.

Why is Salesforce's growth cooling off?

Salesforce generated 92% of its revenue from its subscriptions and support services in the second quarter. That core segment is split into its sales (24% of its revenue), service (25%), platform and other (21%), data (14%), and marketing and commerce (15%) segments. Four of those five divisions posted decelerating revenue growth in the second quarter:

Data source: Salesforce. YOY = Year-over-year.

During the conference call, CFO Amy Weaver attributed that slowdown to "more measured buying behavior" from its customers amid tougher macroeconomic headwinds, which "resulted in stretched sales cycles, additional deal approval layers, and deal compression."

However, co-CEO Marc Benioff assured investors that Salesforce still had the "right team, the right products, (and) the right playbook for getting to $50 billion in revenue in fiscal year '26." That long-term outlook, which Salesforce initially presented two years ago, implies its annual revenue will still grow at a compound annual growth rate (CAGR) of at least 17% through fiscal 2026.

Salesforce's remaining performance obligation (RPO), or the revenue it expects to recognize from its existing contracts, rose 15% year-over-year to $41.6 billion in the second quarter. That stable RPO growth suggests it can continue to generate high double-digit sales growth for the next few years.

Slowing growth, stabilizing margins

Salesforce's revenue growth is cooling off, but its operating margins still expanded sequentially and year-over-year by both GAAP (generally accepted accounting principles) and non-GAAP measures in the second quarter.

Data source: Salesforce.

For fiscal 2023, it expects its non-GAAP operating margin to expand 170 basis points to 20.4%. That rosy outlook indicates it will offset the margin compression from its integration of Slack with its improving scale. During the conference call, Amy Weaver said Salesforce was "continuing to unlock incremental efficiencies across the business" as it expanded.

It expects its adjusted EPS to decline about 1% for the full year, but that year-over-year comparison is distorted by a big investment-related gain last year. If we exclude those gains from both periods, its adjusted EPS would likely grow by more than 20%.

So where will Salesforce's stock be in a year?

Analysts expect Salesforce's revenue and adjusted EPS to increase about 20% and 1%, respectively, in fiscal 2024. Based on those expectations -- which we should take with a grain of salt -- Salesforce's stock trades at 37 times forward earnings and five times next year's sales.

Yet Salesforce still looks cheaper than many of its industry peers. ServiceNow (NOW -4.03%), the cloud-based digital workflow services provider which is growing slightly faster than Salesforce, trades at 64 times forward earnings and ten times next year's sales. Veeva Systems (VEEV -0.71%), which provides cloud-based customer relationship management services to the life sciences sector, is growing at a similar rate as Salesforce but trades at 51 times forward earnings and 13 times next year's sales.

However, many investors might look at Salesforce and decide to buy a more diversified blue-chip software giant like Microsoft or Alphabet, which trade at 28 and 22 times forward earnings, as safer plays for this volatile market. Therefore I don't think Salesforce will decline much further over the next 12 months -- but I don't think it will outperform the broader tech sector either. Instead, its stock will likely tread water for at least a few more quarters until its revenue growth stabilizes again.