Down 7.3% In A Day, Where Is Salesforce Stock Headed?

Salesforce stock (NYSE: CRM) has gained 4% YTD, as compared to the 6% rise in the S&P500 over the same period. That said, the stock price plummeted 7.3% yesterday, April 15th, vs a 1.2% rise in the broader index. The drop came after the reports of late-stage acquisition talks between Salesforce CRM and data management software provider Informatica came to light. Overall, at its current price of $273 per share, CRM is trading 15% below its fair value of $323 – Trefis’ estimate for Salesforce’s valuation.

Amid the current financial backdrop, CRM stock has shown strong gains of 20% from levels of $225 in early January 2021 to around $275 now, vs. an increase of about 35% for the S&P 500 over this roughly 3-year period. However, the increase in CRM stock has been far from consistent. Returns for the stock were 14% in 2021, -48% in 2022, and 98% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 - indicating that CRM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 - in good times and bad - has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CRM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months - or will it see a strong jump?

The company posted better-than-expected results in Q4 FY 2024 (FY Feb-Jan). It reported total revenues of $9.29 billion – 11% more than the year-ago period. The growth was driven by a 12% rise in subscription and support revenues, which benefited from improvement in the sales cloud, service cloud, and integration & analytics segments. Notably, Salesforce derives around 95% of its total revenues from subscription and support income. In terms of costs, the operating expenses witnessed a favorable drop in the quarter, leading to an operating margin of 17.5% vs 4.3%. Overall, the net income jumped from -$98 million to $1.45 billion.

The company’s top line grew 11% y-o-y to $34.9 billion in FY 2024, mainly due to a 12% increase in the subscription & support revenues. Further, total expenses as a % of revenues decreased in the year, improving the operating margin from 3.3% to 14.4%. Altogether, it led to a net income of $4.14 billion vs $208 million.

Moving forward, we expect the same trend to continue in Q1. Notably, consensus estimates for first-quarter CRM revenues and earnings are $9.15 billion and $2.38 respectively. Overall, we forecast Salesforce’s revenues to be around $38 billion in FY2025. Additionally, CRM’s revenue per share is likely to increase to $37.62. This coupled with a P/S of multiple of 8.6x will lead to a valuation of $323.

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