Salesforce (CRM -1.43%) has become what nearly every software-as-a-service (SaaS) company dreams of being when they grow up. Its customer relationship management (CRM) platform is widely used and assists companies with ensuring new and existing clients are cared for through marketing, sales, and customer service.
Despite the company's massive success, the stock remains 44% down from its all-time high. However, after its latest news, Salesforce may have just kick-started a new bull market for its stock. Read on to find out what this catalyst is.
Salesforce is starting to turn the profitability corner
One item that constantly plagues many SaaS businesses is their serial unprofitability. Each company sees a massive market opportunity and is willing to subsidize growth with profitability to capture it. Eventually, investors get fed up with this approach and want to see some profits, which is what Salesforce is doing in its 2024 fiscal year (ending Jan. 31, 2024).
In FY 2024 and the first quarter, Salesforce expects 10% revenue growth, slower than its Q4 growth of 14%. What dampened this blow is that Salesforce's operating cash flows are expected to grow by about 15%, and generally accepted accounting principles (GAAP) earnings per share (EPS) will rise substantially to about $2.60. To help attain this profitability goal, Salesforce plans to lay off about 10% of its staff. While it's unfortunate that people must lose their jobs, Salesforce is adjusting to the current market, which doesn't require as large a sales and marketing staff.
Investors will deal with slower growth if a company can snap its fingers and become profitable. That's what Salesforce is currently doing, and investors love it.
The day after the report, Salesforce's stock was up 12%, although this movement has since worn off, with the stock up only 4% since March 1 (its earnings day). There have been a lot of negative headlines in the news since the sell-off. But many of those don't apply to Salesforce, giving investors a chance to step in and pick up shares before it can get momentum going because management thinks its shares are cheap.
The stock doesn't look that expensive from a historical perspective
Salesforce also announced a massive $20 billion share repurchase program, about 12% of its entire market cap. For most companies, that level of buyback would be another huge catalyst. But for Salesforce, it's necessary due to its high stock-based compensation bill.
In FY 2023, it paid out $3.3 billion in stock-based compensation, or about 11% of revenue. Compared to many SaaS businesses, this isn't a high number. But with Salesforce's repurchase plan, the program will likely offset any impact from its current stock-based compensation scheme.
Plus, Salesforce isn't including any effect of its potential share repurchases in its guidance, so it will likely exceed its EPS mark in FY 2024.
Still, the stock is expensive, trading at 67 times forward earnings. But as Salesforce continues to improve its profitability throughout the year, this metric will come down. Salesforce is still years from optimizing its profits, so investors should take the price-to-earnings ratio with a grain of salt.
When assessing it from a more constant metric than earnings, like its price-to-sales ratio, Salesforce stock looks historically cheap.
CRM Revenue (Quarterly YoY Growth) data by YCharts. YoY = year over year. PS ratio = price-to-sales ratio.
So even though Salesforce's revenue growth is slowing to a pace it hasn't seen, the stock remains well below its historical average.
Salesforce management is making the right moves at the right time, and investors should be excited about the stock's prospects. The stock has strong potential to outperform the markets in 2023 if it can hit its guidance, leaving the door open for a new bull market.
