Salesforce shares fell sharply lower in early Thursday trading, and could potentially shed more than $40 billion in value over the session, after the enterprise software group's disappointing first quarter earnings.
Salesforce (CRM) , a Dow component since 2020, is undergoing a major transition under CEO Marc Benioff, ramping up investment in AI technologies while cutting costs, raising prices and taking shareholder-friendly actions following pressure from activist investors last year.
The group may also be seeing a so-called 'crowding out' of new spending on its flagship enterprise software offerings as clients shift their IT budgets toward AI investments over the coming quarters.
That could explain the group's muted near-term outlook, which sees current-quarter sales in the region of $9.2 billion to $9.25 billion. That tally missed Wall Street forecasts and would lead to the slowest pace of growth since the company went public in 2004.
"We saw elongated deal cycles, deal compression, and high levels of budget scrutiny," president Brian Millham told investors on a conference call late Wednesday.
"In addition, as part of our ongoing transformation, we made some intentional changes in our go-to-market organization to drive long-term productivity and create better customer experiences, which also played a role in the software bookings performance," Millham added.
Analysts seeing value
The group posted earnings of $2.44 a share for the three months ended in April, a 44% increase from the same period last year and exceeding Wall Street forecasts. Revenue grew 11% to $9.13 billion, just shy of analysts' estimates.
Software bookings, however, grew only 2%, the smallest in two decades, and Salesforce said that tally would likely improve only to 6% over the current quarter.
“While Salesforce remains the undisputed leader in (customer relationship management) and application software, its growth story, now driven by modest price hikes and drawn-out cross-sells, clashes with its desire to be viewed as an inspiring, nimble software leader, ready to capitalize on a tremendous AI opportunity," said Third Bridge analyst Charlie Milner.
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A host of Wall Street analysts that cover the group raced to adjust their Salesforce price targets on the back of the muted near-term update, which was softened somewhat as the company reiterated its full-year sales forecast of around $38 billion.
"Despite the weaker-than-expected first-quarter results, the underlying positives this quarter (strong demand for core products) gave management increased conviction in the company's ability to meet its previously mentioned top-line guide for the current fiscal year,' said D.A. Davidson analyst Gil Luria, who carries a 'neutral' rating on Salesforce stock.
"Management continues to deliver sequential margin expansion with the recent (Go-to-Market) changes expected to drive increased productivity in coming quarters," added Luria, who lowered his price target by $70, to $230 per share, following last night's update.
JMP analyst Patrick Walravens held his $342 price target in place, citing both the earnings potential of AI technologies and its broader leadership in the enterprise software space.
"While Salesforce's challenges include a measured buying environment, budgets that prioritize AI, and seat risk as customers get more efficiency per seat, Salesforce has become a more efficient business in response to activist and long-term-investor-driven demands," said Walravens, who carries a 'market outperform' rating on the stock.
Macro headwinds test outlook
Citigroup analyst Tyler Radke says the group's first-quarter revenue miss, as well as its disappointing update, could suggest "more idiosyncratic issues." These include a slowdown in hiring from its bigger clients and stiffer competition from rivals, alongside macroeconomic pressures that "returned with a vengeance."
Radke lowered his price target by $63 to $260 per share, adding that "with slowing growth, lack of derisked estimates and more active M&A, we are comfortable on the sidelines awaiting improving growth or more evidence of data cloud and generative AI." He affirmed his 'neutral' rating on Salesforce.
Wedbush analyst Dan Ives, a longtime Salesforce bull, lowered his price target on the group by $10 to $315 a share, noting that "Benioff & Co. still have confidence in the achieving the year-end goals despite some elongated sales cycles seen in the quarter."
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"We would be buyers on weakness this morning as seeing the forest through the trees this is a turnaround in motion for a premier tech stalwart with a massive installed base led by one of the best CEOs in the global tech landscape in our view," Ives said.
"Salesforce is making major strides in the field around monetizing the AI theme within the massive installed base while also remaining unchanged on its M&A strategy," added Ives, who carries an 'outperform' rating on the stock.
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Mizuho analyst Gregg Moskowitz echoed that view, holding his 'buy' rating in place but lowering his price target by $45 to $300 a share.
"Notwithstanding a poor first-quarter performance and ongoing macro challenges, we believe Salesforce remains well situated to help its vast customer base manage revenue and process optimization via digital transformation, and that the company is in the midst of a new chapter dictated by profitable growth above all else," Moskowitz said.
Salesforce shares were marked 20.6% lower in early Thursday trading to change hands at $215.65 each, the lowest since November of last year and a move that erases all the stock's 2024 gains.
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