What happened
Shares of Salesforce (CRM 0.42%) were trading down 10% as of 12:14 p.m. ET on Thursday after the company delivered financial results that fell short of analysts' expectations.
The company reported double-digit growth in revenue, but next quarter's revenue guidance of $7.98 billion fell short of analysts' estimates calling for $8.02 billion. The lower outlook raised questions about Salesforce's competitive position.
Still, the company continues to win new customers and improve margins, which makes the stock a compelling value after falling 43% in 2022.
So what
Saleforces posted a revenue increase of 14% year over year, which was down from the previous quarter's 22% increase. Excluding the impact of a strengthening U.S. dollar, revenue grew 19%.
Other than foreign currency headwinds, some analysts are concerned that slowing top-line growth could indicate increasing competition. However, management noted that Salesforce continues to gain market share and sign up "great companies like Bank of America, RBC Wealth Management, and Dell Technologies," as co-CEO Marc Benioff explained.
While revenue growth is slowing, the company is seeing strong improvement on the bottom line. Adjusted operating margin reached a record 22.7% in the quarter, up almost 3 points from the year-ago quarter. Improving profitability makes the stock look cheaper as it falls and could set up great returns when market sentiment turns positive again.
Now what
One problem affecting the sentiment around the stock right now is that Salesforce is transitioning from maximizing sales growth to boosting profits. This was brought to the spotlight after the company announced Vice Chairman and co-CEO Bret Taylor will step down. It can take a while for Wall Street to come to grips with these shifts in strategy, which explains the stock's underperformance.
The improving profit outlook means the stock is now selling at an attractive price-to-earnings ratio of 26 based on next year's earnings estimates. This could be a once-in-a-decade buying opportunity for a company expected to grow earnings at an annualized rate of 19% over the next several years.
