Salesforce Falls 25% Into A Once in a Lifetime Opportunity

Key Points

• Salesforce stock plunged following tepid guidance, opening up a once-in-a-lifetime opportunity for investors. 
• The company is still growing and widening its margin, setting it up for robust capital return.
• Analysts are trimming targets, not dumping the stock so that a rebound could begin soon. 

Salesforce NYSE: CRM stock went on sale following the Q1 release, providing investors a once-in-a-lifetime opportunity. It is not every day that a high-quality, industry-leading, blue-chip stock on track to deliver robust capital returns provides a 25% discount, so it likely won’t last long. This is the kind of opportunity investors dream about because the move is due to a reset of expectations, not any fundamental problem with the business. 

Marketbeat.com tracked a dozen revisions within the first twenty-four hours of the release, and they were a primary factor in the decline in stock price. Many, but not all, lowered their price targets, with some as low as $250. However, the takeaway is that no analysts lowered their rating, the consensus is a Moderate Buy, and the consensus price target implies a 35% upside from the post-release price point. The price target is edging lower from the pre-release level but only marginally, putting a cap on the market but giving no reason for the steep decline. 

The takeaways from the analyst chatter are encouraging. The company’s soft guidance caused a reset of expectations, but the forecasts are still robust. The analysts see Salesforce.com as focusing on profitable growth in the near term rather than growth at all costs and being undervalued relative to its peers. Disciplined spending and its position within the industry should help sustain margin improvements, and AI is a tailwind. Regarding the value, the post-release plunge puts the stock at 20X this year’s earnings and lower compared to next, a deep value compared to other blue-chip tech with similar growth. 

Salesforce Has Solid Quarter: Guidance is Tepid

Salesforce had a solid quarter, but results were mixed relative to the analyst expectations, the only negative in the report. The top-line $9.13 billion is up 10.7% compared to last year on strength in subscription and support but fell short of forecasts. The analysts expected another 20 basis points in revenue and stronger guidance. Subscription and Support, the company’s largest segment, grew by 12%, driven by expanding client base, higher pricing, and penetration. 

Margin is the brightest spot in this report. The company’s gross and operating margins widened significantly, with a quadruple-digit basis point gain in the generally accepted accounting principles (GAAP) operating margin and a 450 basis point gain in the adjusted margin. Adjusted operating margin widened to 32.1% and is expected to widen further over time. Adjusted earnings per share (EPS) is up 45%, aided by share repurchases, cash flow is up 39%, and free cash flow is up 43%. Free cash flow came in at $6.08 billion, leaving the capital return to free cash flow payout ratio at 42%. 

Guidance is good but left the analysts cold because growth is weaker than expected and slowing from higher paces. The company forecasted a 7% to 8% revenue gain compared to the 8.5% gain expected by analysts, and the full-year outlook is equally tepid. Salesforce reiterated the revenue growth forecast but reduced the outlook for earnings growth. The salient point is that free cash flow (FCF) growth was reiterated, leaving the outlook for capital return unchanged. 

Salesforce is a Budding Dividend Aristocrat

Salesforce has only paid dividends briefly, but investors can expect long-term value-building. The payout is worth a low 0.75% (annualized) today but beyond safe at 6.5% of the free cash flow. Dividends can be expected to continue and to grow over time, aided by repurchases. The cash flow and balance sheet allow for beneficial repurchases, which reduced the count by an average of 0.3% in Q1, providing some leverage regarding the dividend payment. The Q2 dividend declaration is expected soon. 

Salesforce Falls to a Critical Support Level 

Salesforce stock hit a top earlier this year, corrected by 15%, and added another 20% following the release. The move, driven more by sentiment and the impact of slowing growth, puts the market near a critical support level at $225. That level is consistent with previous support and a significant market reversal and should provide solid support now. In this scenario, CRM could begin to rebound as soon as the opening bell, and there are already signs of buying at the new lows. If not, CRM could fall below $225 and move to $200 or lower.