Shares of Salesforce (CRM 1.05%) soared after the company posted its latest earnings report. For the fourth quarter of fiscal 2023, which ended on Jan. 31, the cloud-based software provider's revenue rose 14% year over year to $8.38 billion and beat analysts' estimates by $390 million.
Its adjusted net income nearly doubled to $1.66 billion, or $1.68 per share, which also comfortably cleared the consensus forecast by $0.32.
For the full year, Salesforce's revenue increased 18% to $31.35 billion, cooling from its 25% growth in fiscal 2022, while its adjusted net income rose 12% to $5.22 billion and accelerated from its 3% decline a year earlier. Those growth rates looked stable, but will the stock continue to head higher over the next 12 months?
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What challenges did Salesforce face in fiscal 2023?
Salesforce is the world's largest provider of cloud-based customer relationship management (CRM) services. It also provides data visualization, analytics, automation, marketing, e-commerce, and enterprise communication tools to those enterprise customers. That sticky ecosystem makes it a leading play on the digital transformations of large businesses.
It generated 93% of its revenue from its subscription and support services in fiscal 2023. That segment houses its sales cloud (23% of its revenue), service cloud (25%), platform and other segment (21%), data cloud (15%), and marketing and commerce clouds (16%). All five of those core businesses experienced decelerating growth in fiscal 2023:
|
Segment |
FY 2021 |
FY 2022 |
FY 2023 |
|---|---|---|---|
|
Sales revenue (YOY) |
13% |
15% |
14% |
|
Service revenue |
20% |
20% |
14% |
|
Platform & other revenue |
40% |
36% |
32% |
|
Data revenue |
75% |
25% |
15% |
|
Marketing & commerce revenue |
25% |
28% |
16% |
|
Total subscription & support revenue |
25% |
23% |
18% |
Data source: Salesforce. YOY = year-over-year.
That slowdown was caused by macro headwinds (which forced many companies to rein in their spending on big cloud software deals) and currency headwinds that shaved 4 percentage points off Salesforce's full-year revenue growth in fiscal 2023. Competition from rival CRM platforms like Microsoft's Dynamics 365 exacerbated that pressure.
Salesforce expects its revenue to only rise about 10% to just under $35 billion in fiscal 2024. It also withdrew its previous long-term goal of generating at least $50 billion in annual revenue in fiscal 2026, which would have required it to grow its annual revenue at a compound annual rate of nearly 17% from fiscal 2023 to 2026.
Cutting costs and stabilizing its margins
As Salesforce's growth decelerates, it's cutting costs to stabilize its margins. It laid off about 10% of its workforce earlier this year. And during the earnings conference call, chief operating officer Brian Millham said the company was still "inspecting every part of our business to find opportunities to drive efficiencies and reduce cost of sales, marketing, and [general and administrative expenses]."
In fiscal 2023, its adjusted operating margin expanded 380 basis points to 22.5% as its adjusted earnings per share (EPS) increased 10%. In fiscal 2024, it expects its adjusted operating margin to expand to 27% as its adjusted EPS rises 36%.
Hitting those targets could potentially appease Starboard Value and Elliott Management, the two activist funds that built up multibillion-dollar stakes in Salesforce earlier this year as the bulls headed for the exits.
However, Salesforce also lost plenty of leaders -- including its co-CEO Bret Taylor, chief strategy officer Gavin Patterson, chief marketing officer Stephanie Buscemi, Slack CEO Stewart Butterfield, and Tableau CEO Mark Nelson -- as its growth cooled off. That executive exodus could leave some of the company's fragmented businesses rudderless as it reins in its spending.
Where will Salesforce's stock be in a year?
At $192, Salesforce trades at 27 times its adjusted EPS forecast for fiscal 2024. That valuation seems reasonable if it continues to expand its operating margins and generate high double-digit earnings growth, but it's not too cheap relative to its industry peers.
Microsoft, for example, also trades at 27 times forward earnings. Microsoft is growing at a slower rate than Salesforce, but its business is more broadly diversified and resistant to macro downturns. Adobe, which competes against Salesforce's sales and marketing clouds, is also growing slower than Salesforce but trades at 21 times forward earnings.
Therefore, I believe Salesforce's stock could stabilize and gradually climb higher this year if it meets its own guidance. It's also possible that it will remain volatile as macro headwinds continue to rattle the entire cloud software sector. But I believe it still has plenty of room to grow as more companies digitize, streamline, and automate their businesses with its cloud-based services.
