This cloud-computing giant is down but not out.
Shares of Salesforce (CRM 0.05%) have frustrated investors by trading down about 20% from their 52-week high earlier this year.
Despite solid profitability and overall strong fundamentals, the customer resource management software pioneer has struggled to reaccelerate growth. The company is betting big on new artificial intelligence (AI) tools integrated across its platform, but the market appears skeptical about whether those efforts are enough to diversify the business beyond its core strengths.
These themes will be in focus when the company reports its second-quarter results on Aug. 28 (for the period ended July 31). Does the recent sell-off offer a good opportunity to buy shares in Salesforce before its Q2 earnings report?
Here’s what you need to know.
A mixed start to the year
Despite the stock price volatility from Salesforce this year, the good news is that the company made significant progress in its goal of delivering more profitable growth.
In the first quarter, earnings per share (EPS) of $2.44 represented a 44% increase from the prior-year quarter as the operating margin of 32.1% expanded by 450 basis points. Salesforce continues to benefit from several efficiency and cost savings initiatives to streamline the business.
On the other hand, the top-line momentum has been less impressive, with the 11% revenue growth last quarter coming in below expectations. Management has lowered its full-year outlook for subscription and support revenue growth to “slightly below 10%,” citing some headwinds from customers delaying or slowing large projects.
These trends here are OK, but they also push back against stronger optimism from the past year, particularly regarding the effect of new predictive AI features Salesforce has rolled out through its Einstein 1 platform launched in 2023. Simply put, Salesforce’s AI offerings have underwhelmed in terms of driving new customer growth and financial results for the company thus far.
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What to expect from Salesforce’s Q2 earnings
For the Q2 report, a couple of key metrics will be closely followed for indications that Salesforce’s operating environment remains healthy.
First, an ongoing international expansion is a big part of the company’s growth strategy. The market will want to see strength in the Asia-Pacific and Europe, Middle East, and Africa regions.
Second, “MuleSoft” and “Tableau” posted a sequential rebound last quarter within the integration and analytics group as a favorable development helping to balance softer trends in the sales and service cloud business. Evidence of growth from new and multiple channels, including AI playing a bigger role in results, would be a positive sign for the company.
In terms of guidance, Salesforce expects Q2 year-over-year revenue growth of between 7% and 8% while targeting adjusted EPS around $2.35, an 11% increase from $2.12 last year.
Maybe even more important than the headline numbers will be the comments from management updating investors on current conditions, setting the tone for the stock into the second half of the year. Ultimately, the sense is that expectations are muted heading into this report, which could provide the company some room to over-deliver as a near-term catalyst for the stock.
Is Salesforce stock a buy?
There’s a lot to like about Salesforce as a cloud computing leader that’s well-positioned to continue growing its market share. I believe the Salesforce platform has evolved into a critical and must-have utility for organizations globally, which is a great runway supporting the company’s long-term future.
That said, I don’t see the stock as a screaming buy at the current level, but instead more deserving of a hold rating. Salesforce shares are trading around 25 times its full-year consensus EPS as a forward price-to-earnings (P/E) ratio, a pricey multiple in my opinion for a company facing slowing growth.
On the upside, a better-than-expected Q2 report would be welcomed, although my baseline is for shares to remain volatile. Patient investors looking to add a position in the stock may find a more attractive entry point with a wait-and-see approach.
Dan Victor has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce. The Motley Fool has a disclosure policy.
