Salesforce: Maintaining Buy, More Upside Likely Ahead

Summary:

• We reiterate our buy-rating on Salesforce.
• 3QFY24 results and FY24 outlook confirm our expectation that CRM will be resilient in spite of the current cautious IT spending environment.
• Management raised guidance for FY24 revenue to $34.75-$34.8B, up 11% Y/Y, ahead of consensus estimates.
• We continue to expect CRM to accelerate top-line growth, supported by its unique position in monetizing the intersection of CRM, data, and AI.
• The stock outperforms the S&P 500 by 14% since our upgrade to buy in mid-September. We believe CRM will outperform through 1H24.

We remain buy-rated on Salesforce (NYSE:CRM) post-3QFY24 earning results and outlook. We continue to expect CRM to accelerate top-line growth supported by its unique position in monetizing the intersection of CRM, data, and A.I. Consistent with our expectations in mid-September, the company’s August price increases are pushing top-line growth in 2HFY24. Management’s comments on the earnings call and raised guidance for FY24 confirm our optimistic view of CRM growth in 2024 and its resilience in the first half of the year as macro headwinds pressuring enterprise budgets are expected to weigh on the software enterprise market. The following outlines CRM’s updated FY24 guidance; management raised guidance for FY24 revenues for the second quarter in a row up to $34.75-$34.8B, up 11% Y/Y, ahead of consensus estimates of $31.8B. We expect CRM to continue outperforming expectations and see more upside for the stock.

CRM reported revenue of $8,720M this quarter, up 11% Y/Y and up from $8.6B last quarter; the company beat adjusted EPS at $2.11 per share versus consensus of $2.06. We think CRM’s subscription and support revenue, accounting for ~93% of total sales, will experience higher double-digit growth in FY25 as the enterprise optimization cycle completes. We see a reacceleration of growth driven by management’s AI innovation cycle; our bullish sentiment on CRM is largely driven by our belief that the company is successfully mastering AI monetization.

The following outlines Subscription & Support and Acquisition Growth Trends up to 3Q24.

The stock outperforms the S&P 500 by around 14% since our upgrade to buy in mid-September. Over the past six months, the stock is up 23%, outperforming the S&P 500 by roughly 17%. While we understand CRM operates in a highly competitive enterprise software market against players like Microsoft (MSFT) and Oracle (ORCL), we think the company has built enough economic moat to gain traction and market share even during the current softer IT spending cycle. The following outlines our rating history on the stock.

Valuation

CRM stock is cheap, in our opinion. The stock is trading at 6.4x EV/C2024 Sales versus the peer group average of 8.2x. On a P/E basis, the stock is trading at 27.1x C2024 EPS $9.43 compared to the peer group average of 73.4x. The stock is trading below the peer group average of the SaaS peer group. We see attractive entry points at current levels and recommend investors begin exploring entry points as we see CRM outperforming in 1H24 driven by its CRM AI roadmap.

The following outlines CRM valuation against the peer group.

Word on Wall Street

Wall Street shares our bullish sentiment on the stock. Of the 48 analysts covering the stock, 32 are buy-rated, 15 are hold-rated, and the remaining is sell-rated. The stock is currently priced at $255 per share. The median sell-side price-target is $275, while the mean is $273, with a potential 7-8% upside. The following outlines CRM sell-side ratings and price targets.

What to do with the stock

We reiterate our buy-rating on CRM. We think the company is better positioned for profitable growth and resilience to macro uncertainty after the August price increases and its CRM AI roadmap. Management continues to raise FY24 guidance this quarter; in our opinion, the raised guidance heightens investor confidence in the stock and pushes stock prices higher. We see attractive entry points to ride the upward trend in enterprise spend through 2024. We recommend investors explore entry points at current levels as we see CRM stock re-rating higher next year.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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