In recent months, investors around the world have been focused on the Federal Reserve's aggressive monetary tightening policy -- and specifically, how the central bank's efforts to stem high inflation might tip the U.S. economy (and others) into recession. One side effect of the Fed's actions is a historic run-up in the value of the U.S. dollar. That can be a positive in some ways, but for multinational businesses, it puts a serious dent in the value of revenues from foreign markets.
That's been a particular headwind for Salesforce (CRM 3.19%). After factoring in the negative impact of unfavorable currency exchange rate moves, the cloud software pioneer forecast a big slowdown in its revenue growth. For the current fiscal year, revenue is expected to rise by just 17%. If that forecast proves accurate, this will be the first time Salesforce has ever reported full-year growth of under 20%.
Given this, it should come as no surprise the once high-flying stock was punished. But how much of that punishment is warranted? If you think this year's bear market overshot the mark on Salesforce, this might be a fantastic opportunity to buy shares.
Salesforce is still very much a growth company
The Salesforce news capturing investors' attention has been that management has trimmed its full-year guidance quarter after quarter. Back in late spring, co-CEO Marc Benioff (uncharacteristically) deflated expectations by slightly lowering revenue growth guidance for fiscal 2023 (which will end in January 2023) to 20%. But after the fiscal Q2 update and yet another run-in with the muscular U.S. dollar, management downgraded the fiscal year revenue growth forecast to just 17%. The company also announced its first-ever share repurchase program, authorizing up to $10 billion in buybacks.
The consensus? Salesforce's days of high growth are in the rear-view mirror, and it's time to treat it more like a value stock. Share prices are down over 40% so far in 2022. Excluding March 2020, when pandemic lockdowns were implemented around the world, the stock trades at its lowest levels since 2019.
NYSE: CRM
Key Data Points
However, while the quarterly reports were capturing the spotlight, many investors completely overlooked the company's annual Dreamforce developers and digital professionals event in late September. During a keynote address, Benioff and co-CEO Bret Taylor unveiled a new real-time customer data tool called Genie that is designed to help companies create personalized experiences on the spot, with the hope of improving digital interactions to land, expand, and retain customers.
Other products were released, from web3-building capabilities to new Slack integrations throughout the Salesforce ecosystem. (Salesforce acquired the enterprise chat and communications company last year.) But beyond its in-house developments, Benioff and company reaffirmed they are committed to growth and profitability. Salesforce remains on track to hit its long-standing $51 billion revenue target in fiscal 2026 (which largely corresponds to calendar 2025). But Benioff also added a new goal: an adjusted operating profit margin of 25% by that year.
For reference, Salesforce expects its adjusted operating margin to be 20.4% this year.
Is this stock too cheap to ignore?
To help the company reach those ambitious growth and profitability goals in the next few years, Benioff also isn't ruling out more acquisitions. Unlike fellow "digital transformation" specialist Adobe (ADBE 1.98%), which up until recently -- when it made its blockbuster buyout of Figma for $20 billion -- largely avoided aggressive acquisition activity, Salesforce hasn't been shy about absorbing small up-and-coming peers.
That's been a controversial strategy since many of these acquisitions have been accomplished by issuing new stock. But Benioff has had a pretty good track record of delivering robust shareholder returns on a free-cash-flow-per-share basis.
Data by YCharts.
Nevertheless, there's always the chance the next acquisition -- assuming one's coming soon -- won't go so well. At this juncture, investors need to weigh whether the current valuation is worth it given the assumptions about the company's growth rate (less than 20% annually) and profitability (adjusted operating margins going from 20.4% to about 25%). As of this writing, Salesforce trades for less than 26 times its enterprise value to free cash flow -- the "cheapest" it has been by that metric in the last decade.
For what it's worth, Salesforce is also on track to be one of the worst-performing Dow Jones Industrial Average stocks of 2022. As of this writing, only beleaguered Intel (INTC 0.21%) is faring worse, down 47% year to date.
But Salesforce is no Intel. Even in tough times, this is still a growth business, the cloud industry overall is still expanding rapidly, and Salesforce is more focused on managing profitability as it nears its long-term $50 billion-plus revenue goal. Based on its guidance for the next three years, this looks like a great buying opportunity to me.
