Shares of Salesforce Inc. (CRM, Financial) are down nearly 50% this year, proving to be yet another victim of the broad market selloff despite being one of the most successful technology companies in the cloud-based software industry.
For many growth investors, Salesforce has always been an appealing proposition because it is one of the leading cloud-based customer relationship management software providers. Further, the company has seen strong revenue growth and market share gains in recent years.
The business
Salesforce operates a CRM platform, Customer 360, which connects customer data across systems, applications and devices. It works with data and platforms across cloud, mobile, social media, analytics software and artificial intelligence-powered solutions, which enable businesses to sell, market and conduct business from anywhere. The company's services also include document management, analytics, custom application development, customer service and additional cloud-based marketing.
The company also allows customers to store data, track leads and progress, forecast opportunities, gain insights and deliver quotes, contracts and invoices. Salesforce is a key player in the software-as-a-service market, having seen its market share steadily increase over the last five years. Its continued growth propelled the company to the top of the enterprise software industry in 2022.
Why has the stock fallen in 2022?
However, concerns regarding rising interest rates and the slowdown in global business activities have caused the stock to struggle this year. Following the pandemic surge, most tech companies have reported slow growth, which should have been anticipated as mobility restrictions in 2020 pulled forward years of expected growth.
Despite reporting robust growth amid challenging operating conditions in late November, Salesforce's stock dropped by more than 8% immediately after the earnings release as investors weighed in on the surprise resignation of co-CEO Bret Taylor. The company issued weak guidance for the next quarter, which was another development that was not welcomed by the market. Although Salesforce has generated positive cash flow for several years, cash flows have recently declined significantly, which is another concern. Operating cash flow for the quarter ended Oct. 30 was $313 million, a 23% year-over-year decline.
The long-term outlook remains promising
Salesforce is the world's largest cloud-based CRM platform provider. Every cloud-based company benefited from the digital transformation trend that accelerated in early 2020, and Salesforce capitalized on this opportunity with its subscription model and proprietary apps. The company expanded rapidly by acquiring smaller companies as well.
After two years of stellar performance, revenue growth has decelerated this year, prompting investors to punish the stock. This slowdown has been caused by macroeconomic headwinds as companies of every size are cutting back on spending and postponing large software deals. The rising dollar, which has been bolstered by higher interest rates, has resulted in currency headwinds as well. Given these macro headwinds, Salesforce expects revenue to rise only 12% to 13% in the fourth quarter with adjusted eanings per share expected to increase by only 3%. The company also expects currency exchange costs to surpass $900 million.
Despite these concerns, Salesforce has a long runway for growth with the world still in the early stages of embracing the work-from-anywhere trend. As companies representing highly regulated industries enter the cloud, Salesforce’s addressable market will expand in the coming years. The company’s major acquisitions in 2022, which included Slack, Tableau, Mulesoft and Demandware, also strengthen its cloud-based ecosystem. The full integration of these platforms should help Salesforce see higher operating margins in the future.
Salesforce announced on Dec. 15 that it will add more than 250 commerce partner apps to AppExchange, a leading enterprise cloud marketplace offering ready-to-install apps, solutions and consultants to help businesses save money, increase efficiency and drive customer success on commerce cloud. The expected improvement in e-commerce penetration of global retail sales in the next five years should also help the company attract more clients.
Wall Street analysts are turning bullish
Earlier this month, many analysts downgraded Salesforce's stock on the back of key executives leaving the company and macroeconomic headwinds continuing to create short-term troubles.
Today, analysts are turning a corner after incorporating the recent decline in Salesforce's stock. Citigroup Inc. (C, Financial) recently released its contrarian picks for 2023 and highlighted that Salesforce is one of its top picks to outperform the market next year. Wedbush analyst Dan Ives also tapped Salesforce as a potential outperformer in 2023 despite the company having a tough time this year.
The rosy long-term outlook for the cloud computing industry has a lot to do with these decisions.
Takeaway
The world's largest provider of customer relationship management software is no longer a favorite among growth investors. The pessimism toward Salesforce is unlikely to change for the better in the short run because of the challenges faced by the tech sector.
In the long run, however, earnings will dictate the market performance of any company, and Salesforce is well-positioned to deliver robust earnings growth in the next decade. The short-term volatility in the stock, therefore, could be offering a long-term opportunity.
