Is Salesforce Stock a Buy Now?

Salesforce's (CRM -1.10%) stock price fell 6% during after-hours trading on May 31 following the release of its latest earnings report. For the first quarter of fiscal 2024 (ended April 30), the cloud-based customer relationship management (CRM) software provider's revenue rose 11% year over year to $8.25 billion and beat analysts' estimates by $80 million. Its adjusted EPS jumped 72% to $1.69 and cleared the consensus forecast by $0.08.

Salesforce's growth rates seemed stable, but the bulls shrugged, and its stock remains nearly 30% below its all-time high from November 2021. Should investors tune out the near-term noise and still buy this stock as a long-term investment?

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Another quarter of decelerating revenue growth

Salesforce generated 93% of its revenue from its subscription and support services in the first quarter. It splits that segment into five cloud divisions: sales (24% of its subscription and support revenues), service (26%), platform and other (21%), marketing and commerce (15%), and data (15%). All of those divisions -- except for the data cloud -- posted decelerating revenue growth in constant currency terms over the past year.

Data source: Salesforce. Note: Revenue growth is on a constant currency basis.

Those core divisions lost their momentum as the macro headwinds prompted more companies to rein in their spending on big software upgrades. During the conference call, chief operating officer Brian Millham said Salesforce was "still operating in an uncertain macro environment" as its "customers continue to scrutinize every deal."

Salesforce expects its revenue to rise 10% year over year in Q2 as well as in fiscal 2024 overall. That matches its prior full-year guidance, but it would still represent a significant slowdown from its 18% growth in fiscal 2023.

Salesforce is focusing on the factors it can control

Salesforce doesn't expect its revenue growth to accelerate anytime soon, so it's focusing on the three things it can control -- its operating margins, its free cash flow (FCF), and its EPS growth -- until the macro environment improves. That's why Salesforce laid off about 10% of its workforce earlier this year.

During the conference call, CEO Marc Benioff said Salesforce would "continue to scrutinize every dollar of investment, every resource, and every spend." He added that boosting its profits would remain its "highest priority." It will also keep spending a large portion of its FCF on buybacks to offset the dilution from its stock-based compensation. As the following table illustrates, those efforts clearly boosted its adjusted operating margin, FCF margin, and adjusted EPS over the past year.

Data source: Salesforce.

Salesforce expects its adjusted operating margin to rise from 22.5% in fiscal 2023 to 28% in fiscal 2024 and continue to expand to 30% by the first quarter of fiscal 2025.

It expects its adjusted EPS to rise 59% to 60% year over year in fiscal 2024's Q2, and to grow 41% to 42% for the full year. At $210, Salesforce stock trades at 28 times the midpoint of that full-year EPS forecast.

That multiple makes the stock fairly cheap compared to its industry peers, which are generating slower growth. Microsoft , which competes against Salesforce in the cloud-based CRM space, also trades at 28 times forward earnings. However, analysts expect its adjusted EPS to grow only 5% in fiscal 2023 (which ends in June) and 13% in fiscal 2024. Adobe -- which competes against Salesforce in the sales, marketing, and analytics clouds -- trades at 24 times forward earnings, but analysts expect it to grow its adjusted EPS by only 13% in fiscal 2023 (which ends in early December).

Is it the right time to buy Salesforce?

Salesforce's revenue growth will likely accelerate again once the macro environment improves. Until that happens, it will continue to streamline its business, expand its margins, and grow its profits -- which should appease the activist investors who've been circling the company over the past year. Its stock probably won't soar past its all-time highs anytime soon, but it's still reasonably valued and an appealing investment for long-term investors.