Salesforce (CRM -0.20%) posted its latest earnings report on Aug. 30. For the second quarter of fiscal 2024, which ended on July 31, the cloud software giant's revenue rose 11% year over year to $8.59 billion and surpassed analysts' expectations by $70 million. Its adjusted EPS jumped 78% to $2.12 and cleared the consensus forecast by $0.24 per share.
Those headline numbers were impressive, but Salesforce's stock only rose 3% the following day and remains nearly 30% below its all-time high. Let's review the bear and bull cases to see if it's still a worthwhile long-term investment.
Image source: Getty Images.
Reviewing the key numbers
Salesforce is the world's largest provider of cloud-based customer relationship management (CRM) services, but it also provides other marketing, e-commerce, analytics, and data visualization services. It splits its ecosystem into five cloud divisions: sales (24% of its subscription and support revenue in the second quarter), service (26%), platform and other (20%), marketing and commerce (15%), and data (15%). Here's how those five businesses fared over the past year.
|
Constant Currency Revenue Growth (YOY) |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Sales |
19% |
17% |
16% |
13% |
12% |
|
Service |
18% |
16% |
15% |
13% |
12% |
|
Platform and other |
56% |
22% |
18% |
12% |
11% |
|
Marketing and commerce |
22% |
18% |
16% |
10% |
10% |
|
Data |
13% |
16% |
20% |
20% |
16% |
|
Total subscription and support |
25% |
18% |
17% |
13% |
12% |
Data source: Salesforce. YOY = year-over-year.
What the bears will tell you about Salesforce
The bears will say that Salesforce's high-growth days are over. Its revenue growth cooled off over the past year as macro headwinds drove many companies to rein in their spending, and Salesforce expects its total revenue to only rise 11% for the full fiscal year (which ends next January). That would represent a significant slowdown from its 18% growth in fiscal 2023 and 25% surge in fiscal 2022.
Salesforce also faces a lot of competitors -- including Microsoft, Oracle, SAP, and Adobe -- in that slowing market. Microsoft, which is integrating its Dynamics CRM platform into its broader cloud-based ecosystem, is a particularly formidable rival. Microsoft's Dynamics 365 revenue notably rose 26% year over year in its latest quarter and easily outpaced the growth of Salesforce's Sales and Service Clouds.
The bears will also note that many of Salesforce's top 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 -- all departed over the past year. Its insiders also sold 2.75 million shares, but didn't buy a single share over the past 12 months, even as its aggressive activist investors stopped tightening the screws.
What the bulls will tell you about Salesforce
The bulls will tell you to focus on Salesforce's expanding margins, stable free cash flow (FCF) growth, and attractive valuation instead of its slowing sales. After being besieged by activist investors, Salesforce laid off about 10% of its workforce earlier this year, halted its big acquisitions, and reined in its other operating expenses. That's why its adjusted operating and FCF margins expanded significantly over the past year.
|
Metric |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
Q2 2024 |
|---|---|---|---|---|---|
|
Adjusted operating margin |
19.9% |
22.7% |
29.2% |
27.6% |
31.6% |
|
FCF margin |
1.6% |
1.4% |
29.9% |
50.7% |
7.3% |
|
Adjusted EPS growth |
(20%) |
10% |
100% |
72% |
78% |
Data source: Salesforce.
Salesforce expects to generate an adjusted operating margin of about 30% for fiscal 2024, compared to 22.5% in fiscal 2023 and 18.7% in fiscal 2022. It also launched its first buyback program last year, and it repurchased $4.1 billion in shares in the first half of fiscal 2024 at an average price $198.63, which is about 10% below its current price.
For the full year, Salesforce expects its adjusted EPS to grow 53% to 54%. At a price of roughly $220 per share, the stock still looks reasonably valued at 27 times that forecast. By comparison, Microsoft -- which is expected to generate just 12% earnings growth in its current fiscal year -- trades at 30 times forward earnings. Adobe has an even higher forward multiple of 31, but analysts expect its adjusted earnings to only rise 15% this year. In short, Salesforce looks cheap relative to its earnings growth and its industry peers.
Which argument makes more sense?
Salesforce's growth is cooling off, but that's mainly due to macro and cyclical challenges instead of any fundamental problems with its core business. Its stock probably won't soar anytime soon, but its improving financial discipline and low valuation still make it a compelling buy -- even if its sales growth stays sluggish throughout the rest of the year.
