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  • Writer's pictureRealFacts Editorial Team

Salesforce Takes 20% Hit After Earnings: Can Software Be Slowing?

Salesforce sign

Take on The Hit

Salesforce Inc. has provided investors with significant reasons to be cautious about the health of the software sector, as evidenced by its recent earnings report for last quarter. On Wednesday afternoon May 29th, Salesforce cut its subscription-revenue outlook and highlighted increased scrutiny on spending by its customers. This resulted in a substantial decline in Salesforce’s stock, which fell 19.7% on Thursday — the largest single-day percentage drop since July 21, 2004, when it fell 27.2%. The 353.30-point drop also marked the largest one-day point drag for a single stock in the Dow Jones Industrial Average in 20 years, according to Dow Jones Market Data.

The broader software sector felt the impact as well. The iShares Expanded Tech-Software Sector exchange-traded fund fell 2.5%, with notable losses in shares of other software companies like ServiceNow Inc. and Adobe Inc.

New Price Target Guidance

Analysts offered varied perspectives on the implications of Salesforce’s report. Bernstein analyst Mark Moerdler expressed skepticism about Salesforce’s core initiatives and its potential to capitalize on AI opportunities. Despite maintaining an underperform rating, he raised his price target slightly to $234 from $231. Moerdler noted that the fundamental weaknesses in Salesforce’s business are becoming more apparent, and investors may need to reassess the company’s growth prospects, particularly the viability of achieving low-to mid-teens growth rates.

Salesforce’s total revenue outlook for the fiscal year remains at 8% to 9% growth, but its subscription-revenue outlook has been reduced to slightly below 10% growth, down from the previous expectation of around 10%. This adjustment led UBS analyst Karl Keirstead to conclude that the overall spending environment has weakened and that a second-half recovery is unlikely. Keirstead maintained a neutral rating on Salesforce shares but lowered his price target from $310 to $250, suggesting some risk of further downward adjustments.

Conversely, Evercore ISI’s Kirk Materne offered a more optimistic view, highlighting Salesforce’s visibility into its pipeline and favorable pricing tailwinds. Despite acknowledging the softness in the latest quarter and the need to de-risk the new outlook, Materne believes Salesforce’s focus on margin expansion and free cash flow growth sets it apart from other software companies. He maintained an outperform rating with a $300 target price.

Overall with a total of 96 analysts giving each of their own price targets the average comes out to be $300.96 for a 1 year price target. This is slightly lower than before however, given Friday 5/31 close price of $234.44 we would be looking at a 28.37% return some time in the next 12 months. Which can be signaled as a buying opportunity, with a fair price at $355.93 from 45 analysts.

Prompting Cautious Outlook

Salesforce reported first-quarter revenue growth of 11%, falling short of the consensus at $9.15 billion. Subscription and support revenue increased by 12% to $8.59 billion, and remaining performance obligations rose by 10% to $26.4 billion. The company’s GAAP operating margin improved significantly, rising 1,370 basis points to 18.7%, while adjusted operating margin reached 32.1%, up from 27.6% in the prior year. Adjusted earnings per share increased from $1.69 to $2.44, slightly surpassing estimates of $2.37.

Co-CEO Marc Benioff emphasized the potential of AI, describing it as a massive opportunity for customers to connect in new ways. However, the demand for AI services appears to be detracting from growth in the conventional cloud software market, as other companies in the sector have also reported slowing growth.

Looking ahead to the second quarter, Salesforce projects revenue growth of 7% to 8%, reaching between $9.2 billion and $9.25 billion, below the consensus estimate of $9.34 billion. The company also lowered its full-year guidance for subscription and support revenue growth to slightly below 10% and reduced its full-year GAAP operating margin guidance to 19.9%. Despite these cuts, Salesforce still expects full-year revenue to grow 8% to 9%, amounting to between $37.7 billion and $38 billion, close to the consensus estimate of $37.98 billion.

The guidance cuts and disappointing second-quarter revenue outlook have understandably unsettled investors, highlighting the challenges Salesforce faces in meeting market expectations amid a slower-growth environment for cloud software. As of right now we can expect single digit growth rates from Salesforce, instead of the normal double digits we are used to, it is a negative outlook however it was a overly dramatic reaction in the market as it has already popped after the disappointment to $234.44 after hitting a bottom of $212.00.

Salesforce stock graph


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