Salesforce Likely Has Further to Fall Despite Earnings Growth

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Like most technology companies, cloud computing giant Salesforce (NYSE:CRM) has seen its stock crushed like a tin can this year. And the pain may not be over for shareholders.

Over the last six months, CRM stock has fallen 44%, including a 36% decline so far this year. Salesforce’s share price currently sits at $162.76, which is nearly 50% below its 52-week high of $311.75. So, is there something fundamentally wrong with San Francisco-based Salesforce, or is its stock simply being dragged lower along with the entire market?

CRM Salesforce, Inc. $162.84

Sagging Sentiment

Despite continuing to beat Wall Street’s earnings expectations, Salesforce has been a victim of sagging sentiment related to high growth technology stocks. Several analysts have downgraded CRM stock in recent weeks as the tech-heavy Nasdaq index has continued to slide, down nearly 30% on the year.

Swiss investment bank UBS (NYSE:UBS) is the latest firm to lower its outlook, giving Salesforce stock a “neutral” rating and lowering its price target to $185 a share from $225 previously.

UBS and other analysts feel that a slumping economy, that could possibly be pushed into a recession by higher interest rates, is likely to negatively impact demand for Salesforce cloud computing services. Many companies could put their cloud computing needs on the backburner should the economic situation worsen as the year progresses, argues UBS. That said, the median price target on CRM stock among 41 professional analysts is currently $254 a share, which implies 56% potential upside from current levels.

Strong Results

Salesforce is scheduled to issue its latest quarterly earnings on May 31. Wall Street will be watching closely to see if the company can continue to beat expectations as it did when it last issued financial results. In March, Salesforce reported earnings per share (EPS) of $0.84, which handily beat the $0.74 a share that analysts had called for. Revenue totaled $7.33 billion, up 26% from a year earlier, and better than the $7.24 billion that was anticipated by analysts.

In addition to the strong results, Salesforce issued strong forward guidance, saying it expects revenue for the first quarter that it reports on May 31 to come in between $7.37 billion and $7.38 billion. For all of this year, the company forecasts revenue of between $32 billion and $32.1 billion. That’s ahead of Wall Street forecasts of $31.78 billion in revenue.

Salesforce has also named Bret Taylor to be the company’s co-chief executive officer (CEO) alongside company founder Marc Benioff, and said that it continues to integrate its products with those of Slack, the business chat app that it bought for $27.7 billion in 2020. The company expects $1.5 billion in sales from Slack this year.

Wait to Buy CRM Stock

As a company, Salesforce continues to perform very strongly and is a global leader when it comes to cloud computing and customer relationship management (CRM) software. But unfortunately, Salesforce is the type of richly valued technology stock that is out of favor with investors right now.

While the decline in Salesforce stock has brought the company’s price-to-earnings ratio down sharply, it still sits at 105.85, which is astronomical compared to the average P/E ratio of 25 among stocks listed on the Nasdaq exchange. This suggests that Salesforce may still be overvalued and could fall further before the stock bottoms and rebounds higher. Given this situation, investors should avoid Salesforce for the time being. CRM stock is not a buy.

On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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