The new year is still young, but Salesforce (CRM 1.89%) has already made big headlines this year. The cloud software giant said it would lay off 10% of its employees, or about 8,000 workers, as part of a cost-cutting plan that also included reducing its real estate footprint. CEO Marc Benioff also hinted that more layoffs could come.
Investors cheered the initial announcement, but is the stock a buy right now? To decide, we brought on a bull and a bear to debate the stock. First, the bull pitch:
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Customer relationship management is a critical business service.
Parkev Tatevosian: Salesforce is one of my favorite stocks to buy right now. The company helps enterprises manage their customer relationships. That's becoming an ever more critical aspect for businesses to optimize. Salesforce provides various services, including sales, marketing, e-commerce, data analytics, and more. Demand for Salesforce's services can be observed in its revenue growth from $3 billion in 2012 to $26.5 billion in 2022. The top-line growth helped boost operating income from $115 million to $548 million between 2016 and 2022.
That said, Salesforce's revenue growth has slowed in recent quarters as enterprises, fearing a recession, have pulled back spending anywhere they can. Unfortunately, this headwind is likely to persist for at least another quarter as central banks continue raising interest rates, the war in Ukraine rages on, and inflation pinches consumer budgets. Salesforce recently announced it would be laying off 10% of its workforce in the coming weeks due to slowing demand.
CRM Price to Free Cash Flow data by YCharts.
Salesforce's stock price may have overreacted to the short-term forces. The stock is trading at a price-to-free-cash-flow ratio of 26, which is nearly the cheapest it has sold for in the last decade. With that in mind, this might be an excellent opportunity for long-term investors to scoop up shares of this business at a bargain valuation.
Too many problems
Jeremy Bowman: It's hard to knock Salesforce's pedigree in cloud software. After all, the company, which was founded in 1999, was an early pioneer in the category and is still the biggest pure-play U.S. cloud software company.
However, despite its track record of success, the company is facing a wide range of problems, both internal and external. After CEO Marc Benioff admitted the company hired too many new employees during the heady days of the pandemic, Salesforce is planning to lay off 10% of its staff. Not only is it cutting positions in its core business, but it's also laying off employees at recent acquisitions like Slack and Tableau, for which it spent roughly $43 billion combined. In fact, media outlets have reported that the layoffs are hitting data analytics platform Tableau especially hard, indicating it likely overpaid for the data analytics platform, while Slack has lost market share to Microsoft Teams, indicating a poor return on that deal as well.
The layoffs and acquisitions appear to be a product of a culture of wasteful spending, and management admitted as much at its recent Investor Day conference when it said it planned to improve lower sales and marketing expenses below 35% of revenue and boost adjusted operating margin to at least 25% by fiscal 2026. The company also spends heavily on share-based compensation, meaning its generally accepted accounting principles (GAAP) operating margin is in the low-single digits.
The company isn't just losing front-line employees, either. In recent weeks both co-CEO Bret Taylor and Slack CEO Stewart Butterfield have stepped down, which is another sign the company is in disarray.
Meanwhile, growth is slowing significantly due to macro headwinds, and it seems to be losing market share to more nimble competitors. In its third-quarter earnings report, the company guided for revenue growth of just 8% to 10% in the fourth quarter, which would be the slowest in its history. Those numbers could get even worse in 2023, as most economists expect a recession.
While Salesforce's turnaround plan might seem promising, there are simply too many challenges facing the company right now, especially for the stock's premium valuation. Investors are better off looking elsewhere.
