Bull of the Day: Salesforce (CRM)

Salesforce CRM reported a solid Q3 on November 30 but investors took the stock down nearly 12% the next day. In this report, we’ll look at the numbers and analyst reactions to determine whether the shares are a better value now.

Salesforce’s non-GAAP earnings of $1.27 per share beat the Zacks Consensus Estimate of 92 cents. Quarterly earnings included a benefit of 28 cents per share from the mark-to-mark accounting of CRM’s strategic investments on a non-GAAP tax rate of 21.5%. However, non-GAAP earnings declined 27% from the year-ago quarter’s earnings of $1.74 per share.

Salesforce’s quarterly revenues of $6.86 billion climbed 27% year over year surpassing the Zacks Consensus Estimate of $6.79 billion. The enterprise cloud computing solutions provider has been benefiting from the robust demand environment as customers are undergoing a major digital transformation that requires fast, data-driven business intelligence and communications with customers.

Also, the recently acquired Slack business boosted revenues and  contributed $280 million in total sales during the third quarter.

Quarter Details

Subscription and Support (93% of total revenues) increased 25% from the year-earlier period to $6.38 billion. Professional Services and Other (7% of total sales) revenues climbed 45% to $484 million.

Under the Subscription and Support segment, Sales Cloud revenues grew 17% year over year to $1.5 billion. Revenues from Service Cloud, one of the company’s largest and the fastest-growing businesses, also improved 20% to $1.7 billion. Marketing & Commerce Cloud revenues jumped 25% to $1 billion. Salesforce Platform and Other revenues were up 51% to $1.3 billion. Also, revenues from Data increased 20% year over year to $900 million.

Geographically, Salesforce registered constant-currency revenues of 23% in America (68% of total revenues), 29% in the Asia Pacific (9%) and 35% in the EMEA (23%) on a year-over-year basis.

Salesforce’s gross profit came in at $5.02 billion, up 25% from the prior-year period. However, gross margin contracted 120 basis points (bps) to 73.1%.

Steady-to-Mixed Guidance

After the 35-cent EPS beat, Salesforce naturally raised their FY22 (ends January) adjusted EPS view to $4.68-$4.69, vs the consensus of $4.42. The company’s prior view was for $4.36-$4.38. And management raised their FY22 revenue view to $26.39B-$26.4B from $26.25B-$26.3B, vs. the consensus of $26.33B.

Salesforce also offered revised FY23 revenue guidance of $31.7B-$31.8B, vs. the consensus of $31.8B, representing upside of 20% annual growth. Another closely-watched metric about future revenues is the remaining performance obligation (RPO), which “represents all future revenue under contract that has not yet been recognized as revenue,” according to the company.

The headline RPO came in at $36.3 billion , for +20% year-over-year advance. Within that figure, the current RPO (cRPO), which “represents future revenue under contract that is expected to be recognized as revenue in the next 12 months” came in at $18.8 billion (+23% YoY), edging out the $18.7 billion consensus.

The Build Up of Bullish Expectations

Part of the set-up for any disappointment in the CRM report was that analysts were so busy upgrading their view a week prior. Here were two good examples…

BofA analyst Brad Sills raised his price target on Salesforce to $360 from $330 citing feedback from the company’s partners that suggested deal activity tracked in line or above expectations in the quarter, often accelerating from “steady” Q2 growth, largely driven by continued momentum across the broader Salesforce stack.

As Sills projected Q3 upside and increased margin discipline as likely catalysts for the shares, he reiterated the stock as a top pick a week before the Q3 print.

Jefferies analyst Brent Thill raised his price target on Salesforce to $360 from $325 on November 23 following a survey of over 40 partners that he called “the most positive survey in the past eight quarters.” In his survey, 83% of respondents noted that their pipelines had improved, while 55% said that their pipelines had improved by more than 5%.

Sentiment on Salesforce had improved since the Investor Day in late September and Thill observed that the set up heading into the company’s Q3 report was attractive due to easy comparisons for billings and CRPO combined with his robust demand checks.

Analysts Remain Bullish on the Dominator

Okay, so that was a sample of the optimism headed into the report. Now let’s look as some analyst reactions afterwards as the stock gapped down over 10%. We’ll start with the glass half-full view…

UBS analyst Karl Keirstead lowered his price target on Salesforce to $315 from $330 but kept a Buy rating on the shares. The company’s Q3 results “lacked the pizzaz” of the prior three quarters which had delivered material revenue guidance raises and improved margin narrative.

Keirstead cited the company’s “skinny” cRPO beat, weaker than expected Q4 ex-Slack cRPO guide, and weaker than expected Q4 revenue view. Following the post-earnings decline however, he stated that the stock looks “attractively priced” at 8.5-times revenue and 40-times free cash flow expected for 2022.

Morgan Stanley analyst Keith Weiss said Salesforce’s Q3 report “likely fell short for investors expecting a more robust growth rebound” given a narrower cRPO beat and smaller FY22 raise. However, he sees his core thesis around accelerating FY23 free cash flow growth as intact given organic constant currency bookings growth near 20% and margin expansion potential, leading him to keep an Overweight rating and $360 price target on Salesforce shares.

Deutsche Bank analyst Brad Zelnick recommended using last Wednesday’s post-earnings selloff in CRM as a buying opportunity. The company reported solid Q3 results that were “ahead of consensus on all metrics,” with particularly strong operating margin nearing 20%. Zelnick noted that while investors were disappointed in the magnitude of the beat, the stock “thesis remains firmly intact.”He kept a Buy rating on Salesforce with a $360 price target.

Mizuho analyst Gregg Moskowitz lowered his price target on Salesforce to $350 from $360 and kept a Buy rating as he noted “mixed” fiscal Q3 results ran into “investors generally hoping for a bit more.” Salesforce’s revenue and operating margins “showed healthy upside,” but the Q4 guidance was more subdued than expected. Moskowitz believes the shares “will likely be sluggish near-term.”

While many analysts who were very bullish prior to the quarterly report kept their lofty price targets north of $350, here was one of the few who actually found justification in the numbers to raise his PT…

Truist analyst Terry Tillman raised his price target on Salesforce to $330 from $315 citing the company’s solid Q3 results with cRPO upside and “relatively strong” performance in its core products. Tillman added that CRM’s operating margins and free cash flow were even ahead of his above-consensus estimates. Tillman further states that with the stock down 6% post-earnings, investors should buy shares “on any weakness”.

Benioff With One Foot Out the Door?

Another bit of news that may have spooked investors was the announcement that Bret Taylor, who has served as President and Chief Operating Officer since 2019 (and Chief Product Officer before that), has been promoted to company Vice Chair and Co-CEO, effective immediately.

Jefferies analyst Brent Thill, one of those who upgraded the stock before the report, saw the promotion of Bret Taylor to co-CEO, as a positive given that Taylor has been at the company for five years and “has a strong product focus.” Despite the Q4 CRPO growth guide of 19%, which would be a 400 basis point sequential deceleration and below the Street at 20% due to foreign exchange and MuleSoft headwinds, Thill was encouraged by the strength in the core business and maintained his Buy rating and $360 price target on CRM.

And the other new “co-CEO” Marc Benioff made an appearance on CNBC’s Mad Money to tell Jim Cramer and viewers “I love Salesforce and I’m never leaving. It’s my life’s pursuit.”

As he described the core of the business growing very quickly, and faster than expected to their FY26 target of $50 billion revenue, he noted “We’re very excited about the future.”

Co-CEO Bret Taylor said the core of Salesforce’s business has “never been stronger.”

Bottom line: CRM is a buy near $250 and may already be putting in a bottom there given last week’s price action.

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