Customer relationship management (CRM) is an important tool for businesses of all sizes. CRM systems effectively serve as a "home base" for key metrics pertinent to a sales cycle. For example, users can input specific dates when they have meetings with potential clients, which can help leadership understand how deals are progressing through the pipeline.

While there are a number of CRM and project management software tools, perhaps the most well-known is Silicon Valley darling Salesforce.com (CRM -7.28%).  Founded over two decades ago by tech wunderkind Marc Benioff, Salesforce quickly rose in popularity due to its innovative, user-friendly features. In a way, Salesforce.com was the original CRM. 

However, throughout its history, Benioff had the foresight to understand what direction technology was moving. As a result, Salesforce.com developed quite the appetite for mergers and acquisitions. While the company has spent tens of billions of dollars acquiring competitors such as MuleSoft, Tableau, and Slack (just to name a few), it now faces new challenges.

Competitors like Microsoft and Oracle are beginning to catch up. Furthermore, Salesforce.com's latest earnings report certainly contained some eyebrow-raising concerns. Let's look at Salesforce.com's year-to-date financial results, how Wall Street views the stock, and its valuation.

How does the current picture look?

Benioff has always had a knack for the spotlight. He's not afraid to make headlines by spending billions of dollars to gobble up competitors that, on the surface, seem tangential to Salesforce.com's platform at best. However, as a visionary, Benioff has a proven ability to understand important trends in the technology landscape and figure out ways to partner with the best in the business. As a result, Salesforce.com has been able to broaden its scope of services, thereby allowing it to cross-sell new products to a wider base of potential customers.

However, exactly two years ago, Salesforce.com spent a whopping $27 billion to acquire chat and document management tool Slack Technologies. While this appeared to be yet another savvy move by Salesforce leadership, the last two years have not been without heavy turbulence. Salesforce.com has faced corporate budget cuts due to the pandemic and lingering inflation, integration problems for Slack, and leadership shake-ups. All these variables contributed their own unique challenges to Salesforce's business.   

During the fiscal 2023 third-quarter earnings call, investors learned quite a bit about the current state of Salesforce's business. For the three months ended Oct. 31, Salesforce reported operating cash flow of $313 million, down 23% year over year, and free cash flow of $115 million, down 52%. The company's CFO, Amy Weaver, explained that lower billings was the primary culprit straining the business. 

Weaver went into more detail as to why billings are lower. She stated:

You recall that last quarter we noted measured customer buying behavior really beginning in July. This led to elongated sales cycles, additional deal approval layers, and deal compression, particularly in enterprise. As Q3 progressed, we saw an even more challenging buying environment, driving intense customer scrutiny on every investment dollar to ensure the highest return possible.

There's a lot of important detail to unpack here. Effectively what leadership is explaining here is that due to the current macroeconomic environment, companies ( particularly large enterprises) are taking a closer look at budgets and scaling back investments.

As a result, deals will stay in Salesforce's pipeline longer, leading to higher pressure to generate new sales and renew existing customers. As deals remain open, billings remain outstanding for longer compared to prior periods, resulting in less cash collected and lower operating capital. Unsurprisingly, Salesforce has joined its tech counterparts in companywide layoffs.      

Businesspeople shaking hands in office.

Image source: Getty Images.

Cut them some slack

Over the last two weeks, Salesforce.com co-CEO Bret Taylor resigned, Slack CEO Stewart Butterfield also resigned, and the stock hit a 52-week low following its earnings report. While this may appear concerning, it's not uncommon for leaders of acquired companies to depart after an agreed-upon exit date. Given that the Slack deal is coming up on its two-year anniversary, it's not entirely surprising to see Butterfield leave.

Taylor's departure, on the other hand, is a bit of a head-scratcher. As a serial entrepreneur, Taylor has a history of co-founding companies and successfully exiting via acquisitions. In fact, he sold his last company, Quip, to Salesforce in 2016 and quickly became a close ally of Benioff.

However, it should be noted that in addition to his responsibilities at Salesforce, Taylor was the former Chairman of the Board at social networking company Twitter. It's been a volatile year for Twitter and its leadership, to say the least. At the end of the day, while Taylor's departure is a blow for Salesforce, as investors we should also keep in mind that Benioff ran the company just fine for a decade and a half.   

What does Wall Street think?

At the moment, Wall Street seems divided on Salesforce stock. During a recent interview on CNBC's Halftime Report, Jason Snipe of Odyssey Capital Advisors explained that his fund exited its position in Salesforce due to concerns over decelerating invoicing, longer sales cycles, and an overall bearish outlook on the software industry as a whole. It's important to note that Snipe's sell-off was before Butterfield's exit, and he clearly stated that Taylor's departure did not influence his decision. 

By comparison, Wedbush Securities analyst Dan Ives appeared on CNBC yesterday and explained his thesis on why he is bullish on the software landscape. According to Ives, his research suggests that big-tech valuations are trading below the last five-year average levels. He named Salesforce.com specifically as his favorite cloud stock and noted the company is ripe for an activist investor. While he calls this a "moment of truth" for Salesforce, Ives stated that the growth potential of the cloud market, combined with Salesforce's existing install base and product suite, make its current drop in valuation look favorable. 

Salesforce's leadership did not exactly give investors a bright outlook. However, the company is taking tough but necessary steps to reduce costs in the form of layoffs. Moreover, as inflation continues to cool down, corporations will eventually ratchet up investments in digital transformation again.

There are a multitude of ways Salesforce can generate growth, and for long-term investors, it's difficult to argue against buying a blue-chip stock as it hovers around its lows. Now could be an ideal opportunity to dollar-cost average into an existing long-term position, or initiate a small position at favorable valuation levels.