Salesforce's (CRM) SaaS business model and its customer relationship management services have been key to its growth in the past five years, but there have been talks of market saturation, which has pressured the stock price as much as 25% since the stock hit a high of $264 last November. Is now a good time to buy or will there be more downside ahead?
The enterprise cloud giant is set to report first quarter fiscal 2021 earnings results after the closing bell Thursday. With the increased digital transition among corporations driven by the shift to work-from-home, Salesforce is poised to get its “mojo” back, according Morgan Stanley analyst Keith Weiss who recently upgraded the stock from Equal-Weight to Overweight with a $270 price target. Among the various catalysts to reach his price target, Weiss noted the company’s billings and booking metrics, which will underscore the strength of Salesforce’s business.
Citing ramping digital transformation demand, the analyst also pointed to the reopening of the economy, saying he believes Salesforce will realize stronger profit margins over the next several quarters. Salesforce’s CRM services provide corporations enhanced tools such as sales, marketing, e-commerce and analytics to grow their businesses. And the company has consistently grown despite emerging competitive threats. Nevertheless, on Thursday, Salesforce will need to convince the market of how it plans to execute all this.
For the three months that ended April, Wall Street expects the San Francisco-based company to earn 88 cents per share on revenue of $5.89 billion. This compares to the year-ago quarter earnings of 70 cents per share on revenue of $4.85 billion. For the full year, which ended in January, earnings are projected to decline 30% year over year to $3.43 per share, while revenue of $25.86 billion would rise 22% year over year.
The company’s four major business segments are each growing strongly: Sales Cloud, Service Cloud, Platform and Marketing & Commerce Cloud. The latter has been the main driver of Salesforce’s subscription growth and its revenue stream. Contributions from recent acquisitions of Tableau and Vlocity are also expected to further boost the top line. But the company's recent $27.7 billion deal for Slack, announced last November and ranking as Salesforce’s largest acquisition, have pressured the share price.
Looking for a competitive edge against Microsoft’s (MSFT) enterprise dominance with Office365, Slack’s many features that allow organizations to collaborate and communicate securely with multiple partners and vendors, including negotiating deals, would provide Salesforce another key revenue stream. At the time of the announced deal, Slack was valued at only $22 billion, meaning Salesforce paid almost a 30% premium for the asset, which isn’t too expensive. But the market sees it differently.
The market is overlooking Slack’s ability to become a powerhouse in the collaboration world. And if Salesforce can leverage Slack’s features to provide corporations with next-generation cross-domain collaboration experience, Slack’s $27.7 billion price tag would have paid for itself. But those are big "ifs." On Thursday, beyond convincing the market of how it plans to accelerate its position as the world’s leading CRM platform, Salesforce must also sell merits of the Slack integration as a potential success.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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