Salesforce.com Inc. underwhelmed with its most recent earnings outlook, prompting questions about how the company will look to sustain growth in the future, and propelling its shares toward their worst performance in more than 20 months.
Shares of Salesforce
were off 10.6% in Wednesday afternoon trading, and on pace for their largest single-day percentage drop since March 16, 2020, when the stock lost 15.9%.
The stock’s $30.33 price drop reduced the Dow Jones Industrial Average’s
price by about 200 points, while the Dow was down 91 points, or 0.3%, in afternoon trading.
While Salesforce exceeded expectations with its headline numbers in its most recent quarter, the company disappointed with its fiscal fourth-quarter forecast.
“Overall, not the quarter investors hoped for and while guidance is likely quite conservative next quarter, especially on margins, expectations were strong after the analyst day,” wrote Bernstein analyst Mark Moerdler, who has a market perform rating and $295 price target on shares. Overall, he dubbed Salesforce’s latest quarter “lackluster.”
A key issue coming out of Salesforce’s report was the company’s margin performance, as Salesforce posted 19.8% operating margins in the most recent quarter. While that number topped expectations, Moerdler thought it seemed “low considering the savings the company had built-up from no travel during the pandemic and cost rationalizations (e.g. real estate) last year.”
Needham analyst Scott Berg, who rates the stock a hold, called the margin results “mildly disappointing versus recent >20% performance.”
The most recent quarter was the first to include a full quarter of results from Salesforce’s Slack acquisition, and Bernstein’s Moerdler expects that the company will have to make another big acquisition soon, perhaps in fiscal 2023.
“Commentary this quarter from management indicated that it could take several quarters to integrate acquisitions and we believe this will reignite the question of whether a large acquisition occurs sooner than many believed coming out of the investor day,” he wrote. “We believe that the company will need to make increasingly large acquisitions in order to boost growth and that sustained margin improvements will not be as strong as many were hoping for.”
Of course, big acquisitions bring their own risks, and Salesforce acknowledged during its earnings call that the company has seen “headwinds” with MuleSoft, which it bought in 2018 in a deal that assigned MuleSoft an enterprise value of $6.5 billion.
“When a business is growing as quickly as MuleSoft is, there are scaling challenges you can face, and we experienced some of those challenges this quarter,” Chief Financial Officer Amy Weaver said on the call.
Monness, Crespi, Hardt & Co. analyst Brian White described the call as having a “mixed” tone given upside at Slack but some difficulties with MuleSoft.
“Although Salesforce tried to put a happy face on last night’s results, we sensed less excitement relative to past calls and we believe the company would have been wise to leave its guidance unchanged at its Investor Day in late September,” he wrote.
See more about Salesforce’s investor day
Salesforce also announced late Tuesday that Bret Taylor, formerly the company’s president and chief operating officer, would be stepping into a co-CEO role, but Monness analyst White appeared uncertain about the move.
“We believe it is prudent to tread with caution in his new role as we question the sustainability of a split CEO structure,” he wrote in his note to clients. White has a buy rating and $328 price target on the stock.
The analysts who cover Salesforce are a generally bullish bunch, with 42 of the 49 analysts tracked by FactSet sporting buy-equivalent ratings on the stock. Among that crowd, Salesforce found defenders following its report.
“Stepping back, we believe the [stock’s] reaction was overblown,” wrote RBC Capital Markets analyst Rishi Jaluria. “We continue to like CRM as a core SaaS [software-as-a-service] holding, given market leadership in key software areas, positioning to consolidate IT spend, and many growth drivers.”
Jaluria rates the stock at overweight with a $325 target.
Shares of Salesforce have declined 5.1% over the past three months as the Dow has fallen 2.6%.