Salesforce, Inc. CRM is gearing up to announce its third-quarter fiscal 2025 results on Dec. 3, with the Zacks Consensus Estimate pointing to a 15.2% year-over-year rise in non-GAAP earnings per share (EPS) to $2.43.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
While this suggests some optimism on the surface, the underlying picture reveals significant challenges. The double-digit growth rate in earnings, though respectable, pales compared to the consistent 35%+ gains Salesforce reported in six of the previous seven quarters.
Salesforce’s Sluggish Revenue Growth: A Pressing Concern
Salesforce, once synonymous with robust double-digit revenue growth, is now battling a slowdown. After years of 20%-plus growth through fiscal 2022, the company’s revenue expansion slowed to low double digits in the first quarter of fiscal 2025, followed by high single digits in the second quarter. The Zacks Consensus Estimate for the third quarter indicates a modest 7.1% year-over-year increase in revenue to $9.34 billion.
Economic uncertainties and geopolitical tensions have led businesses to tighten IT budgets and delay significant investments. Customers are increasingly cautious, opting for smaller, short-term projects over ambitious, multi-year digital transformation initiatives. This shift has impacted Salesforce’s Professional Services division, where large-scale deals are delayed or scaled back.
This shift in customer behavior is particularly damaging to Salesforce’s revenue growth. The company’s Professional Services division is also seeing a decline in demand for multi-year transformation deals. In some cases, projects are being delayed or scaled back, further impacting revenue growth.
Salesforce Inc. Price and EPS Surprise
Salesforce Inc. price-eps-surprise | Salesforce Inc. Quote
Salesforce’s Strategic Shift: A Double-Edged Sword
Salesforce has shifted its strategy from aggressive expansion to focusing on margin improvement. This shift has led to significant cost-cutting measures, including layoffs, which have temporarily boosted profitability. However, these cuts have come at the expense of critical investments in sales and marketing, which are essential for driving future growth.
The strategy has resulted in a noticeable deceleration in Salesforce’s sales growth over recent quarters. According to our model estimates, Salesforce's revenues for the third quarter are expected to increase a mere 7.1% year over year to reach $9.34 billion. Our model projects the Subscription and Support segment to contribute approximately $8.8 billion and the Professional Services division to add $537 million.
Salesforce’s Earnings Growth: A Silver Lining With Caveats
Despite the headwinds, Salesforce’s bottom line is projected to grow. The cost optimization strategy, combined with its robust product portfolio and leadership in customer relationship management software, has bolstered profitability. However, the deceleration in revenue growth threatens to dampen earnings momentum.
If Salesforce cannot reaccelerate revenue growth while maintaining operational efficiency, its ability to deliver consistent earnings growth may be compromised.
CRM’s Zacks Rank & Stocks to Consider
Currently, Salesforce carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the broader technology sector are Dropbox DBX, Fortinet FTNT and Twilio TWLO, each carrying a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today's Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Dropbox’s 2024 earnings has been revised 17 cents upward to $2.39 per share in the past 30 days, which suggests a year-over-year increase of 20.7%. The company has an estimated long-term earnings growth rate of 12%.
The Zacks Consensus Estimate for Fortinet’s 2024 earnings has been revised upward by 14 cents to $2.18 per share in the past 30 days, which calls for an increase of 33.7% on a year-over-year basis. The company has an estimated long-term earnings growth rate of 18.3%.
The consensus mark for Twilio’s 2024 earnings has been revised upward by 11 cents to $3.64 per share over the past 30 days, which indicates a 48.6% increase from that reported in 2023. The company has a long-term earnings growth expectation of 41.8%.
Must-See: Solar Stocks Poised to Skyrocket
The solar industry stands to bounce back as tech companies and the economy transition away from fossil fuels to power the AI boom.
Trillions of dollars will be invested in clean energy over the coming years – and analysts predict solar will account for 80% of the renewable energy expansion. This creates an outsized opportunity to profit in the near-term and for years to come. But you have to pick the right stocks to get into.
Discover Zacks’ hottest solar stock recommendation FREE.Salesforce Inc. (CRM) : Free Stock Analysis Report
Fortinet, Inc. (FTNT) : Free Stock Analysis Report
Twilio Inc. (TWLO) : Free Stock Analysis Report
Dropbox, Inc. (DBX) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
