Salesforce's (CRM 1.27%) shares closed at an all-time high of $309.96 during the peak of the tech stock rally in November 2021. At the time, the leader of the cloud-based CRM (customer relationship management) services market seemed like a solid long-term investment.
But as of this writing, Salesforce's stock trades at about $155. It was cut in half as investors fretted over its cooling growth and macroeconomic challenges. Rising interest rates exacerbated that sell-off by broadly crushing the tech sector.
Could Salesforce's stock drop even further as the bear market drags on? Or could it recover as it streamlines its business and the macro environment improves? Let's weigh the bear and bull cases to find out.
Image source: Getty Images.
What the bears will tell you about Salesforce
Salesforce expects its revenue and adjusted earnings per share (EPS) to rise 17% and 3%, respectively, in fiscal 2023 (which ends on Jan. 30). In fiscal 2024, analysts expect its revenue and earnings to grow 11% and 17%, respectively.
That slowdown isn't disastrous, but the bears will point out that Salesforce is growing more slowly than comparable cloud-based software companies. ServiceNow (NOW 1.13%) -- which streamlines digital workflows with its cloud-based services -- is expected to grow its revenues by 23% in 2022 and 22% in 2023. Monday.com (MNDY 2.15%) -- which enables companies to develop their own custom apps -- is expected to grow its revenues by 66% in 2022 and 30% in 2023.
Part of that slowdown can be attributed to the recent macro headwinds, which caused large companies to rein in their software spending. However, Salesforce still faces stiff competition from Oracle, SAP, and Microsoft (MSFT 0.46%) in the CRM market. During Microsoft's latest conference call, CEO Satya Nadella said Dynamics 365 -- which grew its revenue 29% year over year on a constant currency basis during the quarter -- was still "taking share" from its CRM competitors.
As Salesforce's growth cools off, it's reeling from an ongoing loss of top executives -- including its co-CEO Bret Taylor, chief revenue officer Gavin Patterson, chief marketing officer Stephanie Buscemi, Slack CEO Stewart Butterfield, and Tableau CEO Mark Nelson. All those high-profile departures, along with Salesforce's recent decision to lay off 10% of its workforce, suggest it's struggling with internal turmoil and operating inefficiencies.
There's also a stunning lack of insider confidence in Salesforce's stock. Over the past 12 months, its insiders sold 53 times as many shares as they bought. They also haven't purchased a single share over the past three months.
What the bulls will tell you about Salesforce
The bulls will remind investors that Salesforce still controlled 22.9% of the global CRM market in the first half of 2022. Its four closest rivals -- Microsoft, Oracle, SAP, and Adobe -- held a combined share of 19.2%. Therefore, Salesforce might face competitive headwinds, but its brand should still remain synonymous with cloud-based CRM services.
Moreover, Salesforce still expects its adjusted operating margin to expand 200 basis points to 20.7% in fiscal 2023, and eventually surpass 25% by fiscal 2026. That expansion suggests it won't lose its pricing power anytime soon.
The bulls will note that even though Salesforce is growing more slowly than ServiceNow or Monday.com, it's fundamentally cheaper at less than five times its fiscal 2024 sales. ServiceNow and Monday.com trade at 10 and eight times their sales estimates for 2023, respectively. Salesforce trades at just 20 times its free cash flow (FCF) estimate of $7.3 billion for fiscal 2024. ServiceNow trades at 32 times its estimated FCF for 2023, while Monday.com's FCF is still negative.
Those low valuations suggest that Salesforce's stock could bounce back quickly after it weathers the near-term macro headwinds, streamlines its core businesses, and gets its house in order. That's probably why two high-profile activist investors -- Starboard Value and Elliott Management -- have recently accumulated multi-billion-dollar stakes in Salesforce.
Last but not least, Salesforce still expects to generate more than $50 billion in annual revenue in fiscal 2026 -- which implies its top line will still grow at a compound annual growth rate (CAGR) of at least 17% from fiscal 2023 to 2026.
Which argument makes more sense?
It's tempting to kick Salesforce while it's down, but the right time to be bearish was at the apex of the growth stock rally in late 2021. Now that its stock has been cut in half and trades at attractive valuations again, its downside potential could be limited as the company trims its fat, resets its business, and attracts the attention of aggressive activist investors. Based on these facts, I believe the bullish case for Salesforce makes a lot more sense than the bearish one.
