Salesforce's (CRM 0.42%) stock was cut in half last year as investors fretted over the cloud software specialist's slowing sales growth and the exodus of top executives. Rising interest rates exacerbated that pressure by crushing higher-growth tech stocks.
But since the beginning of the year, Salesforce's stock has soared nearly 70%, while the Nasdaq only advanced about 30%. Let's review the four green flags that brought the bulls back to Salesforce -- and whether this cloud king still has room to run.
Image source: Getty Images.
1. Salesforce's expanding margins
Salesforce's revenue growth decelerated over the past year as macro headwinds forced businesses to rein in their software spending. That slowdown, which attracted a lot of attention from activist investors, drove Salesforce to lay off thousands of employees and execute other cost-cutting measures to expand its adjusted operating and free cash flow (FCF) margins. Both margins widened over the past year and boosted its adjusted earnings per share (EPS), even as revenue growth cooled off.
|
Metric |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
24% |
22% |
14% |
14% |
11% |
|
Adjusted operating margin |
17.6% |
19.9% |
22.7% |
29.2% |
27.6% |
|
FCF margin |
46.5% |
1.6% |
1.4% |
29.9% |
50.7% |
|
Adjusted EPS growth (YOY) |
(19%) |
(20%) |
10% |
100% |
72% |
Data source: Salesforce. YOY = year over year.
That's why analysts expect Salesforce's adjusted EPS to grow 42% in fiscal 2024 (which will end next January), even as its revenue only rises 11%. That's a solid growth rate for a stock that trades at 30 times forward earnings.
2. Its new AI Cloud
Salesforce had already expanded into the AI market with Einstein, which added AI-powered predictive tools to its sales, service, and marketing clouds, nearly seven years ago. However, its recent launch of the AI Cloud -- which will extend its reach with Einstein's new "GPT Trust Layer" for auto-generating personalized emails, chat replies, case summaries, and even code for sales agents, marketers, and developers -- will enable it to join the same generative AI market as OpenAI's ChatGPT.
Salesforce plans to integrate those generative AI tools into its customer relationship management (CRM) platform. It's already the largest CRM company in the world, and those AI upgrades could help it stay ahead of its smaller CRM competitors like Adobe, Microsoft, and Oracle. Salesforce's new AI Cloud might not significantly boost its near-term revenue, but its introduction is making it an attractive target amid the recent buying frenzy in AI stocks.
3. A deeper partnership with Google
Salesforce and Alphabet's Google are natural partners. Salesforce leads the cloud CRM market but lacks its own cloud infrastructure platform, while Google owns a leading cloud infrastructure platform but doesn't develop its own native CRM services. That's why Google provides plenty of ways for its Workspace users to natively integrate Salesforce's CRM tools into their apps.
Therefore, it wasn't surprising when Salesforce and Google recently expanded that partnership with new native integrations between Salesforce's Data Cloud and Google's BigQuery (for creating unified profiles of customers) and Vertex AI (for predicting buying behavior, churn likelihood, and other trends for individual businesses).
By strengthening its bonds with Google, Salesforce could shore up its defenses against Microsoft, which has its own cloud platform (Azure) and CRM platform (Dynamics); and Adobe, which bundles its CRM tools with its other cloud-based services.
4. Its first price hikes in seven years
Finally, Salesforce recently announced that it will raise its list prices by about 9% across its Sales Cloud, Service Cloud, Marketing Cloud, Industries, and Tableau divisions in August. That will be Salesforce's first price hike in seven years.
Raising prices in this challenging macro environment might seem risky, but it also shows that Salesforce has a lot of confidence in its pricing power. If this gambit pays off, it could significantly boost its revenue per customer.
Is Salesforce's stock headed even higher?
Salesforce's expanding margins, rising profits, and reasonable valuation all make it a fairly safe stock to buy right now. Looking ahead, the expansion of its AI ecosystem, its deeper native integrations with Google, and its coming price hikes all indicate it's getting ready to capitalize on the secular expansions of the big data, AI, and cloud markets. Simply put, I believe Salesforce's stock still has plenty of room to run over the long term.
