Salesforce (CRM 0.27%) stock reacted to the Federal Reserve raising interest rates the same as most technology companies -- its share price fell 34% over the last year. Worse, the slowing economy is only just starting to impact the company's growth outlook, with guidance for revenue in the fiscal fourth quarter disappointing investors. Consequently, the stock sank to a 52-week low on Dec. 22, and the risk of it falling below those lows again remains significant.
Considering that most economists believe the world is on the precipice of a global recession, should investors abandon the stock, or take a contrarian view and buy near its recent lows?
Why investors should be cautious
Things began going downhill for Salesforce in July 2022, when it started experiencing foreign currency headwinds and a downturn in sales due to the poor macro environment. Recently, CEO Marc Benioff said that customers' buying behavior "reflects a lot of what we've seen" during financial crises the company experienced in 2001, 2008, and 2009. And no Salesforce investor wants to hear that companies are slowing distribution capacity expansion, failing to add service people, freezing hiring, laying off workers, and halting marketing spending: When other companies restrict expenditures on marketing, they hurt Salesforce's growth, as a big part of what it does is help its customers with sales- and marketing-related activities. Management now anticipates business fundamentals deteriorating, so the company recently announced a layoff of 10% of its workforce.
Additionally, the company released surprising news in early December that on Jan. 31 co-CEO Bret Taylor is leaving Salesforce -- the second co-CEO to go in the last three years. Between questions about what the loss of Taylor means for the company's direction and investor worries over slowing growth, the short-term outlook for this stock looks bleak. As a result, it's best to be cautious about investing in this company in the current environment.
A company for long-term investors
Salesforce dominates an industry called customer relationship management (CRM). It's the first company to provide customers with a suite of cloud products that support sales, service, marketing, commerce, analytics, and customer experience -- everything necessary for its clients to find customers and close deals. It has powerful secular tailwinds from cloud adoption driving revenue growth.
Salesforce also has a solid brand. In May 2022, for the ninth consecutive year, market intelligence company International Data Corporation (a subsidiary of Blackstone) ranked it as the No. 1 CRM provider -- and this market is enormous. The company estimates its total addressable market in the cloud will grow at a 13% compound annual growth rate (CAGR) to $290 billion by 2026. And it expects to grow into that market at a 17% CAGR to $50 billion in annual revenue by 2026. If its projections hold, Salesforce will be growing faster than its overall market.
Long-term investors love this company because it is already profitable and has a positive free cash flow (FCF). Plus, it plans to increase margins and return 30% to 40% of annual FCF to shareholders by 2026.
Investors value companies that display financial discipline, expand margins, increase free cash flow, and return capital to investors, especially in a bad macroeconomic environment. Therefore, you may want to monitor Salesforce's progress toward the financial goals that it outlined at its Investor Day in September 2022. Should it meet its goals, the market will eventually reward this company.
Not its first rodeo
Salesforce has gone through several terrible markets before and has come out the other side thriving, with Benioff at the helm.
Salesforce has a well-established game plan focusing on gaining market share, investing in the future, and -- most importantly -- establishing operational discipline, meaning controlling costs. Benioff said that when the company used its game plan for downturns in the past, it resulted in a radical acceleration of growth as the economy began to rebound.
Salesforce sells at a price-to-sales (P/S) ratio of 4.8, near its 10-year low of 4.2. As a result, many consider the stock undervalued, given the company's long-term growth potential. If you buy today, you're counting on its fundamentals rebounding strongly as the economy recovers.
If you can weather the economic storm over the next 12 to 18 months, Salesforce remains one of the best long-term growth investments.
