Salesforce Inc.’s story had lost some of its luster recently amid a revenue-growth slowdown, but the software giant was basking in glory yet again Thursday after it projected a big profit increase in the year ahead.
Shares of Salesforce CRM,
“It was a long time coming, but [Salesforce] finally got over the hump related to [operating] margins this quarter and in our view, ushers in a new upside case for the shares,” wrote Evercore ISI analyst Kirk Materne.
He added that “there has always been plenty of optionality for [Salesforce] around margins, but until now, it has been a trickle, not a step function move.”
Materne noted that bears may deem Salesforce’s roughly 10% revenue-growth forecast for fiscal 2024 to be too high, but there is a compelling broader point, in his view.
Salesforce’s margins “are now materially ahead of schedule (27% for [fiscal year 2024] vs. +25% for [fiscal year 2026] offered at [analyst] day) and [Salesforce] is well positioned to be one of the best cash-flow-growth stories in software,” Materne wrote, as he maintained an outperform rating on the stock and upped his price target to $230 from $200.
Baird analyst Rob Oliver highlighted “a clear shift in tone towards margin improvement, with the company exceeding their original profitability target by two years.”
In his view, “the magnitude of profitability improvement coupled with +10% revenue growth guidance surprised many,” and he said he would “continue to look for ongoing execution towards these targets.”
Oliver has a neutral rating on Salesforce shares but boosted his price target to $200 from $150.
Read: Snowflake reduces revenue growth target, and the stock is falling
Salesforce has attracted the attention of numerous activist investors who have been agitating for change at the company, and DA Davidson’s Gil Luria thought the company’s Wednesday afternoon report would help “defang” those activists.
It’s “[h]arder for activists to ask for more short term cuts as revenue easily exceeded expectations at 17% constant-currency growth,” while the company also gave a forecast for double-digit growth in fiscal 2024, Luria wrote. “We believe the revenue beat is even more impressive given the broadly mixed-to-negative checks.”
The company further appeased Wall Street by announcing that it was increasing its stock-buyback program to $20 billion, and while activists might want a spinoff of a pricey recent acquisition like Slack, they may have less of a case these days.
“We believe that [Salesforce] has done so much to address activists that the push for a spin may be harder to justify, especially since [Salesforce] is unlikely to get anywhere near the $28 [billion] it paid for Slack,” Luria continued. “Given the gains some of the activists can realize at these share prices, their commitment to that pressure may not be quite as strong.”
He rates the stock at neutral as he lifted his price target to $180 from $150 but warned that “the spending environment will still get harder” for Salesforce.
Guggenheim analyst John DiFucci titled his note to clients: “An Old Dog Can Learn New Tricks (If It Wants to).”
“In a stark divergence from the Salesforce of old, Mr. Benioff proclaimed that the company’s highest priority is profitability,” he wrote. “We have never questioned Salesforce’s ability to generate margins, but have long been skeptical of management’s willingness to give investors margins, and more importantly, cash flow — something that we long accepted as a cultural decision as long as Mr. Benioff was at the helm.”
He considered the company’s projected adjusted operating margin expansion “a welcome surprise,” though he still has some concern that Salesforce’s revenue target for fiscal 2024 “isn’t a given.” DiFucci reiterated a neutral rating on Salesforce’s stock after the report.
Bernstein’s Mark Moerdler was even more cautious.
“While many hope that margins can continue to improve significantly (and growth could rebound when the economy improves) the company has to execute extremely well on many levels — not an easy task,” he wrote. “In addition, unless one believes that growth significantly rebounds, the stock is substantially overpriced versus similar mature software companies. The risks continue to overshadow the rewards for investors, and we maintain our underperform rating.”
Moerdler has an underperform rating on Salesforce shares but brought his price target up to $145 from $119 in his most recent note to clients.
