Salesforce (CRM) Stock Trades Up, Here Is Why

Petr Huřťák /
2023/11/30 11:17 am EST

What Happened:

Shares of customer relationship management software maker Salesforce (NYSE:CRM) jumped 7.6% in the morning session after the company reported third quarter results with revenue exceeding Wall Street's expectations by a narrow amount, but both current and total RPO (remaining performance obligations, a leading indicator of revenue) beat more convincingly. In addition, non-GAAP operating profit and non-GAAP EPS outperformed expectations. Free cash flow was yet another bright spot, outperforming by a large magnitude and giving the company ample firepower to invest organically or return capital to shareholders. Despite acknowledging the impact of macro trends on the business, management highlighted "green shoots" at the top of the funnel and in growth in large deal sizes. They also called out ongoing headwinds in professional services (consistent with weaker service revenues from partners this quarter), self-service, and in-period revenues. 

Looking ahead, while next quarter's revenue guidance was roughly in line, non-GAAP EPS guidance was ahead. Finally, full year fiscal 2024 guidance was raised slightly for revenue but more convincingly for operating margin, EPS, and operating cash flow, despite ongoing investments in AI and Data Cloud. Overall, the results were not perfect, but demonstrated a very solid performance.

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What is the market telling us:

Salesforce's shares are quite volatile and over the last year have had 4 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 3 months ago, when the stock gained 6.6% on the news that 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 drove 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, 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."

Salesforce is up 81.7% since the beginning of the year. Investors who bought $1,000 worth of Salesforce's shares 5 years ago would now be looking at an investment worth $1,716.

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