Salesforce’s stock plunge is mostly ‘an overreaction’: Analyst

Shares of Salesforce (CRM) are falling on Thursday after the company reported its first quarter results. The company posted a revenue miss for the first time in nearly two decades and slashed its subscription and support revenue forecast. CFRA Research Senior Equity Analyst Angelo Zino joins Morning Brief to discuss these results.

Zino notes that companies investing in their AI initiatives comes at the expense of Salesforce’s revenue trajectory. He points out that companies have to “fight for these dollars,” a “headwind rather than a tailwind” for Salesforce’s operations.

Regarding the stock plunge, Zino believes “it’s a little bit of an overreaction.” Although some areas disappointed, the company still saw growth of 11% during the quarter. Zino also notes that a pickup could occur in the back half of the year due to the company’s “recurring revenue nature.”

“I think … the real issue right now is on the growth trajectory for this company. It’s where does the growth number really kind of bottom out,” Zino tells Yahoo Finance.

Read more about Salesforce here.

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This post was written by Angel Smith

Video Transcript

Sales force shares plunging this morning after reporting its first revenue miss in nearly two decades and slashing its forecast for subscription and support revenue.

The company’s president saying on a conference call that they saw quote elongated deal cycles, deal compression and high levels of budget scrutiny.

For more on this, we’re joined by Angelo Zino CFR, a research analyst.

Uh that was essentially a deal makers triple whammy if you will and not in a great sense there, Angelo.

So what do you make of that?

Yeah, I mean, I I’d say kind of, you know, we’re in an environment right now where, you know, enterprise dollars are kind of tough to come by and you know, we are big believers that this is kind of an environment where um the enterprise space needs to invest heavily in A I and um a lot more dollars are going into A I initiative.

The problem is it could potentially be coming at least in the term at the expense of kind of increasing um the increasing revenue trajectory for sales force.

So um there’s there’s kind of a lot of dollars to kind of you, you’ve got to fight for these dollars here.

And as far as kind of um sales force is kind of concerned, um I think they’re kind of um looking at a, I, at least in the near term is more of a headwind rather than a tailwind.

Angela.

Let’s talk about the stock reaction that we’re seeing right now.

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You have shares off just about 17% ahead of the open.

If this does hold, it will be the biggest drop that we’ve seen in sales force since 2008.

The street’s reaction to this investor reaction to this.

Do you think that’s warranted?

I think it’s a little bit of an overreaction, to be honest with you.

I mean, we kind of look at the, the the growth numbers here.

I mean, they grew 11% roughly in line here in the quarter.

Clearly, all the disappointment is in terms of the guidance you’re looking at, um you know, at least for the July quarter, 7 to 8% growth kind of, um you know, the lowest growth rate in the company’s history, definitely a concern out there.

I mean, actually, you know, creates more uncertainty in the back half of the for this company.

They kept their revenue guidance roughly intact of about 8 to 9% top line growth.

But when you kind of look at the July guide here, um it almost anticipates a little bit of a pick up um kind of going into the back half So if we were not to see that, um you know, that would, you know, definitely kind of, you know, potentially, you know, lead to another leg down in terms of the shares or at least allow the shares to continue to uh be muted in nature.

That’s that um you kind of look at the, you know, where the stock is trading at from a from a evaluation perspective, trading about 2021 times our calendar 25 EPS estimate as well as free cash flow expectation out there.

And when you kind of look at the margin trajectory, the recurring, you know, uh you know, business na uh recurring revenue nature of this company, it’s hard for us to kind of see more downside, at least from a valuation for the company.

If that is the case, then, I mean, this is an all out rejection perhaps in the near term of how much the company might be spending.

And we were talking about the Capex continuing to expect cap X for the fiscal year to be slightly below 2% of revenue they mentioned on the call.

Uh That’s really been the hit on a lot of companies as they’ve talked about their A I investments, is that what’s playing out here today?

Yeah, I mean, as far as kind of some of the Capex concerns on, on the software side of things, you know, clearly it’s been, I I’d say more on some of the you know, the cloud based type companies out there.

Now that, that said, I mean, um, you know, sales force does have to continue to invest aggressively, um, on the, on the R and D side of things.

And, um, but that said, I mean, you, you’re looking at margins holding up extremely well right now, um, for this company, in fact, we actually had to increase our earnings estimate for the calendar per year because of the fact that they continue to execute so well, um on the earnings side of things.

So, um I think right now the the the real issue right now is um on the growth trajectory for this company, it’s, you know, where does the the growth number really kind of bottom out here for sales force as well as, you know, for the entire kind of enterprise software space, you know, you kind of look at at sales force specifically, I mean, they essentially doubled their revenue during the pandemic years um over a four year time time span.

So I think there’s, that’s part of the issue right now is kind of um you know, having that a higher, a much higher kind of revenue base where you’ve got to now try to find a more normalized le level four kind of revenue growth.

And not to mention, um a lot of those A I initiatives kind of the the investments that they’re making into A I probably doesn’t come into fruition until late 2025 early 2026.

In the meantime, a lot of those A I dollars that the enterprise is spending on probably going into, you know, um towards, you know, training um you know, creating uh investing in these models, renting kind of that, that GP U space on the cloud side of things, which is why you’re seeing an acceleration of growth on the cloud side of things and you continue to see that growth rate decelerate on the staff side.

Should investors be bracing for another large scale acquisition?

They talked about this a little bit on the call last night.

I think it, I think the door is open for that potentially.

And I, you know, they were definitely asked about it.

I don’t think they, you know, they provided the answer that most have hoped for and that was um you know, we, we don’t wanna, you know, we’re not looking for any type of M and A here.

Um But that said, I mean, we saw a number of activists kind of jump into the stock in, in, in 2022 early 2023.

And um you know, clearly, um if you were to kind of, you know, look at the investment community out there, they don’t want um any type of massive M and a within sales force.

But um when you kind of look at kind of some of the speculation out there in recent months with um a potential deal of informatica.

Now that’s kind of been retracted.

But that said, I mean, it looks like sales force um potentially is looking for M and A out there in order to kind of reinvigorate growth within the company.

We’ll see.

But that is absolutely a risk, I think for investors out there for uh this name.

All right, Angelo Zino, great to have you.

Thanks so much for hopping on with us here this morning.

CFR A is a research analyst.