Salesforce‘s (CRM 2.28%) the stock fell 7% in the after hours session on August 24 following the release of its second quarter report. The cloud-based software company’s revenue rose 22% year-over-year (26% in constant currency terms) to $7.72 billion, beating analysts’ estimates by $20 million. Its adjusted net income fell 15% to $1.19 billion, or $1.19 a share, but still cleared the consensus forecast by $0.19.
However, Salesforce gave a weaker-than-expected forecast for the rest of the year. It expects its revenue to rise 14% year-over-year in the third quarter and to rise 17% for the full year. Analysts expect 18% growth in the third quarter and 20% growth for the full year.
Image source: Getty Images.
Does that slowdown indicate that darker days are ahead for this cloud software giant? Let’s examine Salesforce’s growth rates, its upcoming catalysts and challenges, and its valuations to see where its stock will be headed in the next 12 months.
Why is Salesforce’s growth slowing?
Salesforce generated 92% of its revenue from its subscriptions and support services in the second quarter. That main segment is divided into its sales (24% of its revenue), service (25%), platform and other (21%), data (14%), and marketing and commerce (15%) segments. segments. Four of those five divisions posted weakening revenue growth in the second quarter:
|
weather |
FY 2021 |
FY 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|
|
Sales Revenue Growth (YOY) |
13% |
15% |
18% |
15% |
|
Service Revenue Growth (YOY) |
20% |
20% |
17% |
14% |
|
Platform and Other Revenue Growth (YOY) |
40% |
36% |
55% |
53% |
|
Data Revenue Growth (YOY) |
75% |
25% |
22% |
12% |
|
Marketing and Commercial Revenue Growth (YOY) |
25% |
28% |
15% |
17% |
|
Total Subscription and Support Revenue Growth (YOY) |
25% |
23% |
24% |
21% |
Data source: Salesforce. YOY = Year-over-year.
During the conference call, CFO Amy Weaver attributed that slowdown to “more measured purchasing behavior” from its customers amid tougher macroeconomic headwinds, which “resulted in extended sales cycles, additional layers of deal approval, and deal compression.”
However, co-CEO Marc Benioff assured investors that Salesforce still has “the right team, the right products, (and) the right playbook to get to $50 billion in revenue in fiscal year ’26.” That long-term outlook, first presented by Salesforce two years ago, indicates that its annual revenue will still grow at a compound annual growth rate (CAGR) of at least 17% through fiscal 2026.
Salesforce’s residual performance obligation (RPO), or the revenue it expects to recognize from its existing contracts, rose 15% year-over-year to $41.6 billion in the second quarter. That steady RPO growth suggests it could continue to generate high double-digit sales growth for the next few years.
Slowing growth, stabilizing margins
Salesforce’s revenue growth is cooling, but its operating margins still expanded sequentially and year over year by both GAAP (generally accepted accounting principles) and non-GAAP measures in the second quarter .
|
weather |
FY 2021 |
FY 2022 |
Q1 2023 |
Q2 2023 |
|---|---|---|---|---|
|
Operating Margin (GAAP) |
2.1% |
2.1% |
0.3% |
2.5% |
|
Operating Margin (Non-GAAP) |
17.7% |
18.7% |
17.6% |
19.9% |
Data source: Salesforce.
For fiscal 2023, it expects its non-GAAP operating margin to expand 170 basis points to 20.4%. That rosy outlook suggests it will offset margin compression from its Slack integration with its scale improvement. During the conference call, Amy Weaver said Salesforce will “continue to unlock incremental efficiencies across the enterprise” as it expands.
It expected its adjusted EPS to decline about 1% for the full year, but that year-over-year comparison was skewed by significant investment-related income last year. If we exclude those gains from both periods, its adjusted EPS would likely grow by more than 20%.
So where is Salesforce stock in a year?
Analysts expect Salesforce’s revenue and adjusted EPS to increase by about 20% and 1%, respectively, in fiscal 2024. Based on those expectations — which we should take with a grain of salt salt — Salesforce stock trades at 37 times forward earnings and five times next year’s sales.
However, Salesforce still appears to be cheaper than many of its industry peers. Service Today (NOW -0.54%)the cloud-based digital workflow services provider is growing slightly faster than Salesforce, trading at 64 times forward earnings and ten times next year’s sales. Veeva Systems (VEEV 1.11%)which provides cloud-based customer relationship management services to the life sciences sector, is growing at a similar rate to Salesforce but trades at 51 times forward earnings and 13 times next-year sales.
However, many investors may look past Salesforce and decide to buy a more diversified blue-chip software giant such as Microsoft o Alphabet, which trade at 28 and 22 times forward earnings, as the safer play for this volatile market. Therefore, I don’t think Salesforce will outperform the next 12 months — but I don’t think it will outperform the broader technology sector either. Instead, its stock will likely tread water for at least a few quarters until its revenue growth stabilizes again.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Alphabet (A shares), Salesforce, Inc., and Veeva Systems. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, Salesforce, Inc., ServiceNow, Inc., and Veeva Systems. The Motley Fool has a disclosure policy.