Is Salesforce's New Rally The Beginning Of A Big Uptrend?

Key Points

• Data aggregator Salesforce has notched gains in the past three sessions. 
• Investors support the company's layoffs announcement, which will slash expenses this year.
• Analysts were disappointed in the company's most recent revenue guidance but revised their fiscal 2024 earnings estimates higher. 

Data aggregator Salesforce Inc. NASDAQ: CRM is in rally mode, notching gains in the past three sessions. The stock gapped up at the open Monday and ended the session 4.69% higher at  $147.10.

The company started off the new year by announcing it would lay off 10% of its workforce. It’s not uncommon to see layoff news give a stock a boost. While it may seem like heartless investors are cheering at employees’ expense, it’s not necessarily about the fat cats: Reduced headcount does lower expenses and help boost the bottom line. That in turn, can raise the stock price for countless 401(k) account owners and others who are saving for retirement. 

That’s especially important for an S&P 500 component like Salesforce, which is tracked by widely held exchange-traded funds such as the SPDR S&P 500 ETF NYSEARCA: SPY or the iShares S&P 500 ETF NYSEARCA: IVV, which many retirement investors have in their accounts.

Salesforce is also part of the 30-stock, price-weighted  Dow Jones Industrial Average, so it’s one that analysts and institutional investors watch closely. 

So what’s the prognosis for Salesforce in 2023? 

To answer that, let’s take a step back: Like many techs, the stock delivered a solid performance in 2021, advancing 14%. That’s not as strong as younger, newly-minted cloud specialists, such as Upstart Holdings Inc NASDAQ: UPST, which advanced 276%, but for a more established large cap, 14% is not a bad yearly return. 

Last year did not treat Salesforce so kindly, though. The stock is down 35.57% in the past year. 

Beating Earnings And Sales Views

In late November, when the company last reported earnings, Salesforce beat analysts’ views by $0.19, as data compiled by MarketBeat show. The company also delivered moderate revenue upside relative to projections. 

However, its guidance for the current quarter was disappointing to some analysts. 

A lot of that has to do with revenue guidance. The company expects revenue from $7.93 billion to $8.03 billion. Wall Street had been eyeing revenue of around $8 billion, so even the midpoint of the company’s view came in lower than that figure. 

For the full fiscal year of 2023, which wraps up at the end of this month, Salesforce said it sees revenue coming in between $30.9 billion and $31 billion, also disappointing, given Wall Street’s expectation of  $30.98 billion. 

Nearly every business has encountered some headwinds in the past couple of years, and Salesforce is no exception. In this case, customers take longer to decide and evaluate each purchase more carefully. 

That’s expected to continue. 

Elongated Sales Cycle

In the company’s third-quarter earnings call, chief financial officer Amy Weaver said, “You recall that last quarter we noted measured customer buying behavior really beginning in July. This led to elongated sales cycles, additional deal approval layers, and deal compression, particularly in the enterprise.”

She added that as the quarter progressed, Salesforce saw “an even more challenging buying environment, driving intense customer scrutiny on every investment dollar to ensure the highest return possible. During Q3, this behavior was most pronounced in our U.S. and major European markets, while Japan remains more resilient.”

Weaver even broke down buyer behavior by industry, saying the most impacted were retail, consumer goods, communications, and media, while travel, hospitality, manufacturing, automotive, and energy were proving more resilient. She noted that commerce and marketing had the most spending pressure when it came to business functions. 

While none of that is devastating, it’s not great, either, particularly for the near-to-medium term. 

So to come back to the stock’s prognosis: what’s causing the recent uptick, and where is Salesforce headed from here? 

Right-Sizing

Unfortunately for the laid-off workers, the expense cuts are going over well with investors. Many tech companies became bloated during the pandemic heyday and are now “right-sizing,” or getting back to a level of staffing that makes sense for an economy that’s not so red hot. 

Wall Street expects earnings to grow 17% to $5.77 per share in fiscal 2024, revised higher recently. According to MarketBeat analyst data, the consensus rating is “moderate-buy” with a price target of $195.12, a potential upside of 35.12% in the next 12 to 18 months. 

If recent trading is any indication, Salesforce may be regaining the confidence among institutional investors after a long price decline. With shares rebounding from their December lows, when they were trading at March 2020 levels, Salesforce may finally be worthy of adding to a watchlist.