What Happened:
Shares of customer relationship management software maker Salesforce (NYSE:CRM) jumped 6.56% in the morning session after the company reported second quarter results that beat analysts' revenue, non-GAAP operating profit, and adjusted EPS expectations. The company also slightly improved its gross margin vs. last year. Those really stood out as positives in these results. What is driving the stock up as well is the slight increase in full year revenue guidance accompanied by a meaningful increase in profit and cash flow guidance. Additionally, Salesforce is calling for 10+% constant-currency cRPO (current remaining performance obligations, a leading indicator of revenue) growth next quarter, which is better than fears of the company slipping into the single digits for that important metric.
Zooming out, we think this was a strong quarter, showing that the company is staying on target. Following the results, multiple Wall Street analysts raised their price targets for Salesforce. J.P. Morgan analyst Mark Murphy raised his price target from $230 to $240, adding, "We maintain our view that Salesforce operates a business model that is bending, but not breaking, even within a challenging macro that is affecting all software companies, and we continue to see eventual upside from current levels as the company pivots to a recession playbook and balances slower growth with profitability and FCF generation while infusing Generative AI capabilities into its clouds." After the initial pop the shares cooled down to $224.79, up 4.42% from previous close.
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What is the market telling us:
Salesforce's shares are quite volatile and over the last year have had 8 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was three months ago, when the stock dropped 5.85% on the news that the company reported first quarter results that beat analysts' revenue, remaining performance obligations (RPO, a leading indicator of revenue), free cash flows, and earnings per share expectations (EPS) expectations.
On the other hand, revenue guidance for the full year was reiterated and slightly missed analysts' expectations while implied full-year non-GAAP operating profit was ahead. For the next quarter, revenue and cRPO (current RPO) were roughly in line. Management highlighted plans to infuse AI into its entire product portfolio, but also pointed to macro uncertainty, longer deal cycles, deal compression, and some project delays.
Overall, it was a solid quarter with slightly underwhelming guidance, and some cautious commentary.
Salesforce is up 66.7% since the beginning of the year, and at $224.79 per share it is trading close to its 52-week high of $234.37 from July 2023. Investors who bought $1,000 worth of Salesforce's shares 5 years ago would now be looking at an investment worth $1,470.
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