Salesforce Stock Dropped More Than 20% In One Day, What’s Next?

+26.44%
Upside
236
Market
298
Trefis
CRM: Salesforce logo
CRM
Salesforce

Salesforce stock (NYSE: CRM) dropped 21.6% on 30th May, as compared to the 1% decrease in the S&P500. In sharp contrast, Salesforce’s peer Oracle (NYSE: ORCL) stock was down only 5% over the same period. The sharp drop in the CRM stock price came after the company declared its first quarter (FY 2025) earnings. It missed the revenue consensus for the quarter and posted lower-than-expected guidance numbers for Q2 and full year FY 2025. Overall, the stock is down 19% YTD vs a 10% rise in the S&P 500. Further, at its current price of $218 per share, it is trading 27% below its fair value of $298 – Trefis’ estimate for Salesforce’s valuation

Amid the current financial backdrop, CRM stock has seen little change, moving slightly from levels of $225 in early January 2021 to around $215 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. Overall, the performance of CRM stock with respect to the index has been quite volatile. Returns for the stock were 14% in 2021, -48% in 2022, and 98% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that CRM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including MSFT, AAPL, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CRM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company reported total revenues of $9.13 billion – up 11% y-o-y, primarily due to a 12% gain in subscription and support revenues. While all the sub-segments under subscription & support posted growth, the division mainly benefited from a 10% increase in the sales cloud, an 11% rise in the service cloud, and a 24% jump in the integration & analytics category. Notably, Salesforce derives around 95% of its total revenues from subscription and support income. In terms of costs, the operating expenses witnessed a favorable decrease in the quarter, leading to an operating margin of 18.7% vs 5%. Overall, the net income improved from $199 million to $1.53 billion.

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Salesforce’s top line grew 11% y-o-y to $34.9 billion in FY 2024 (Feb-Jan). It was driven by a 12% increase in the subscription & support revenues. Further, total expenses as a % of revenues decreased in the year, leading to an operating margin of 14.4% vs 3.3%. Altogether, the GAAP net income jumped from $208 million to $4.14 billion.

Moving forward, the company expects the Q2 revenues to remain between $9.20 billion – $9.25 billion. All in all, we estimate Salesforce’s revenues to be around $38 billion in FY2025. Additionally, CRM’s revenue per share (RPS) is likely to increase to $37.59. This coupled with a P/S of multiple of 7.9x will lead to a valuation of $298.

 Returns May 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 CRM Return -21% -19% 211%
 S&P 500 Return 4% 10% 134%
 Trefis Reinforced Value Portfolio 5% 5% 642%

[1] Returns as of 5/31/2024
[2] Cumulative total returns since the end of 2016

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