Despite executing on all cylinders, Salesforce (CRM) hasn’t escaped the massive rotation out of high-growth tech stocks. Since reaching its all-time high of $312 in November, shares of Salesforce have been in a clear downtrend, losing as much as 37%.
Since the start of the year, the stock has lost 20% of its value, including declines of 8% and 21% in the respective one month and six months. This is even though the company’s four major business segments are each growing strongly: Sales Cloud, Service Cloud, Platform and Marketing & Commerce Cloud. The latter has been the main driver of Salesforce’s subscription growth and its revenue stream. The CRM platform which offers business intelligence insights also allows companies the ability to centralize data and personalize customer service.
Ahead of its fourth quarter fiscal 2021 earnings results after the closing bell Tuesday, investors want to know if this is a good time to buy. Salesforce has steadily grown its market shares in these end markets. Morgan Stanley analyst Keith Weiss believes that to be the case, saying the company is likely to keep seeing tailwinds in front office software spending. There is "little evidence of spending being pulled forward given its unique market positioning and leadership in these categories.”
Citing the company’s SaaS business model and its customer relationship management leadership, other analysts have weighed in on Salesforce’s ability to capture market share during the digital adoption of its enterprises customers. The company’s ability to meet complex business problems has been the key differentiating factor, despite the emergence of competitive threats from the likes of Workday (WDAY), Snowflake (SNOW), among others. And this is likely to have driven increased subscriber growth during the just-ended quarters. Nevertheless, on Tuesday investors will look closely at Salesforce’s billings and booking metrics to assess how well these market share gains can turn to increased profits.
For the three months that ended January, Wall Street expects the San Francisco-based company to earn 75 cents per share on revenue of $7.24 billion. This compares to the year-ago quarter earnings of $1.04 per share on revenue of $5.82 billion. For the full year, earnings are projected to decline 4.8% year over year to $4.68 per share, while full-year revenue of $26.4 billion would rise 24.2% year over year.
The fact that full-year profits are projected to decline by almost 5% has weighed heavily on the stock. In recent quarters the company has disappointed investors when it comes profitability. In the third quarter, Salesforce's operating margin (on a GAAP basis) declined 350 basis points to 0.6%, down from 4.1% in the year-ago quarter. And when comparing it to the 8.8% margins in Q2 the operating margin decline is even more meaningful. But it wasn’t all bad news.
Salesforce's total revenue in Q3 grew 27% year over year to $6.86 billion, beating the Street's expectations of $6.80 billion. During the quarter, Salesforce's original product, Sales Cloud, the company's main cash cow, grew 17% year over year to $1.5 billion, marking a growth acceleration of two percentage points from Q2. Service Cloud, its largest revenue generator, rose 20% year over yea to $1.7 billion. And thanks to the Slack acquisition, Q3 platform revenue surged 51% to $1.3 billion.
These results show that Salesforce continues to benefit from tailwinds from digital transition as companies strive to get closer to the consumer and optimize their operations. On Tuesday, Salesforce will need to show continued strength and momentum in its core business. The company it will need to guide in a manner that suggest there is no signs of slowing down.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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