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Strength in the tech sector has been a huge stock market storyline in 2023, highlighted by the Nasdaq's best first-half performance in decades. This outperformance has spilled over to the Dow Jones Industrial Average ($DOWI), too. The broader Dow is up just 6.3% on the year, while shares of tech-focused component Salesforce Inc (CRM) have surged by 55% this year.
Valued at a market cap of $206 billion, CRM still trades 50% below its all-time highs. As the market's recent outperformers start to pull back, let's see if Salesforce can continue its impressive rally, or if investors should take their profits on this cloud stock.
Is Salesforce Stock a Buy, Sell or Hold?
Salesforce is the leading customer relationship management (CRM) platform globally. Its cloud-based CRM applications across verticals such as sales, service, and marketing can be easily set up and managed, allowing companies to manage customer interactions on a single unified platform that's accessible across devices.
With over 150,000 companies using its platform, Salesforce has been the leading CRM software provider globally by sales for the last ten years. The company has tripled sales from $10.5 billion in fiscal 2018 to $31.4 billion in fiscal 2023 (ended in April). It's also the fastest-growing top-5 enterprise software company in the world.
In its fiscal Q1 of 2024, Salesforce reported revenue of $8.2 billion, an increase of 11% year over year. It onboarded several prominent clients in Q1, including Spotify (SPOT), Siemens (SIEGY), NASA, and the U.S. Department of Defense. Operating cash flow rose 22% year over year to $4.5 billion, while remaining performance obligations, or RPOs, were up 11% at $46.7 billion.
Salesforce emphasized its focus on transformation, and cost optimization drove results in Q1. It reported an adjusted operating margin of 27.6%, an increase of 1,000 basis points year over year - an exceptional result, given the higher pricing environment.
What's Next for CRM Stock Price and Investors?
Despite a tepid macro environment, Salesforce raised its margin targets for fiscal 2024. It expects to report an operating margin of 28% in 2024, an increase of 550 basis points compared to the year-ago period. It also expects this metric to improve to 30% in Q1 of fiscal 2025. Salesforce forecasts sales between $34.5 billion and $34.7 billion in fiscal 2024, an increase of 10% year over year.
Plus, due to cost-savings initiatives, Salesforce expects operating cash flow growth between 16% and 17%, with capital expenditures forecast at 2.5% of sales.
Earlier this year, Salesforce unveiled EinsteinGPT, the first generative AI for CRM. The product was showcased at the Trailhead DX event in March, and may be a key revenue driver for the company. EinsteinGPT allows customers to connect with multiple large language models while providing toolsets to design generative AI apps that can be built on "reasonable prompts."
Salesforce remains laser-focused on restructuring efforts that should improve profit margins amid a challenging period. Similar to megatrends like the cloud, social media, and smartphones, Salesforce expects AI to lead the next cycle of innovation.
What is the Target Price for Salesforce Stock?
Priced at 31.5x forward earnings and 6.5x forward sales, Salesforce might seem expensive. However, most analysts remain optimistic about the stock's future prospects.
Out of the 26 analysts covering Salesforce stock, 22 recommend a "strong buy," 2 recommend a "moderate buy," 13 recommend a "hold,” and 1 recommends a “strong sell.” The average price target for CRM stock is $232.06, about 12% above its current trading price.
Due to its improving margins and cash flow profile, Salesforce can reinvest in growth, pursue accretive acquisitions, and enhance shareholder wealth via buybacks. Since August 2023, it has returned $6 billion to investors via share buybacks, representing 38 million shares. In Q1, it returned $2.1 billion to investors.
Salesforce is a company that enjoys high switching costs and a wide economic moat. Its expanding portfolio of products and solutions, improving financials, and market leadership position make it a top investment choice for long-term investors, despite its relatively high valuation and impressive gains already in 2023.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
