The software technology sector has a long, arduous road ahead. During the peak of the COVID-19 pandemic throughout 2020 and 2021, several names in big tech proved how valuable technology is and how much businesses and people rely on it. In response to surging growth, many companies in the technology arena went on hiring sprees as a result. Unfortunately, though, this level of growth was not sustainable.
Although we are only one month into 2023, companies such as Microsoft, Amazon, Alphabet, Shopify, Spotify, and Salesforce.com (CRM -7.28%) have all announced layoffs. One notable investor, Michael Burry, who famously predicted the housing collapse in 2008, has recently called out Salesforce.com in a recent Twitter thread.
While investors were pleased to read the news regarding layoffs, Burry believes that this reaction is short-sighted and that tough times are ahead for the customer relationship management (CRM) leader.
Shake it off
The last few weeks have been tumultuous for Salesforce.com and its CEO Marc Benioff. Tech news outlet TechCrunch reported in early December that three top executives at Salesforce were leaving the company. These executives were Slack CEO Stewart Butterfield, Tableau CEO Mark Nelson, and Benioff's counterpart Bret Taylor.
While this can appear concerning on the surface, it is key for investors to zoom out. Salesforce, which is known for its strategic mergers and acquisitions, acquired Slack and Tableau over the last few years. Generally speaking, during the integration phases of an acquisition, the leadership team of the acquired company will stay on board for a predetermined amount of time. Given that Slack and Tableau have been a part of Salesforce's umbrella for several years now, it is not entirely surprising that Butterfield and Nelson eventually departed.
Bret Taylor's departure, however, should raise some eyebrows. While it is fair to speculate that there may be some tension among Salesforce's top leaders, investors should keep in mind that Taylor is a serial entrepreneur. In fact, he became a part of Salesforce because the tech giant acquired his start-up. During Salesforce's fiscal 2023 third-quarter earnings call in December, Taylor alluded that he plans to return to his roots in building start-ups.
Image source: Getty Images.
Things could get interesting
Management departures were not the only thing to catch the eye of investors during the earnings call in December. Salesforce leadership also announced that the company would be undergoing layoffs in an effort to reduce costs. Investors initially applauded this announcement with Salesforce stock jumping slightly on the news. However, famed short-seller Michael Burry was less enthusiastic. The hedge fund manager took to Twitter to explain that he thinks layoffs are no reason to celebrate, and the stock should have fallen on the news.
Typically, when Michael Burry states an opinion about a stock, the investing world's ears tend to perk up. If garnering the attention of Burry weren't enough, news has broken that a significant portion of Salesforce stock has been acquired by three activist investors: Inclusive Capital Partners, Starboard Value, and Elliott Management Corp.
Activist investors get their name, because unlike passive investors, they tend to take a proactive role behind the scenes. After negotiating for a board seat, activist investors generally work alongside company leadership to turn around broken or troubled operations. While investor opinions regarding activist investing may differ, the general consensus seems to be positive as it relates to Salesforce. The company's stock is up 17% over the last month, following weeks of ongoing speculation about activists taking a stake.
What is Wall Street saying?
Analysts at Cowen, as well as Bernstein, recently downgraded Salesforce stock. Interestingly, both analysts cited slowing revenue growth and concerns around costs as primary reasons for the downgrades. The slowing revenue growth is a valid point as Salesforce faces fierce competition in the CRM space, particularly from Microsoft at the enterprise level and Monday.com at the small and medium-sized business level. Moreover, despite the addition of Slack and messaging to its product offering, Microsoft swiftly introduced its competing tool, Microsoft Teams.
Derrick Wood from Cowen & Co. recently stated during an interview on CNBC that it is far too early to tell what is in store for Salesforce and its activist investors. The analyst seemed to mimic Burry's opinion and not give too much credit to the layoffs and cost reductions. According to Wood, these reductions in costs are necessary if Salesforce wants to achieve the level of margin expansion the company previously guided for and that investors expect.
On one side of the equation, long-term investors may view it as an opportune time to lower their cost basis. But on the other side of the equation, the stock has run up quite a bit recently, purely on speculation that activist investors can help steer this ship around. Given the polarizing views on Wall Street, coupled with intense competition and unknown plans from the activists, the most prudent thing for investors to do is just keep a keen eye on the stock.
