6 Salesforce Analysts React To Slack Deal: 'Game-Changer Potential'

Shares of salesforce.com, inc. CRM were trading lower Wednesday after the company reported earnings and revenue beats in the third quarter but fell short of expectations for its fourth-quarter guidance.

Salesforce also announced its intention to acquire Slack Technologies Inc WORK at an enterprise value of $27.7 billion.

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Salesforce reported third-quarter adjusted EPS of $1.15 on revenue of $5.42 billion. Both numbers beat consensus analyst estimates of 75 cents and $5.25 billion, respectively. Revenue was up 20% from a year ago.

Looking ahead, Salesforce guided for fourth-quarter EPS of between 73 cents and 74 cents and revenue of between $5.665 billion and $5.675 billion. Analysts had been expecting EPS of 86 cents and revenue of $5.52 billion.

The earnings and guidance numbers were mixed for Salesforce, but the Slack deal is the biggest game-changer for Salesforce in the near-term. Several analysts have weighed in on Salesforce since Tuesday’s report.

Earnings Dilution: Morgan Stanley analyst Keith Weiss said Salesforce will likely need Slack to drive between $450 and $500 million in net synergies for the deal to be break-even from an earnings standpoint by 2025.

“A preliminary analysis of a potential Salesforce + Slack proforma model suggests low 20% EPS dilution in CY21, improving to low single digits dilution by CY25,” the analyst said. 

Morningstar analyst Dan Romanoff said guidance was mixed, but the Slack news clearly stole the show.

“We think the price tag was steep at $28 billion in total and about $46 per share, based on deal terms of $26.79 in cash and 0.0776 shares of Salesforce common stock,” he said. 

Wedbush analyst Daniel Ives said the Slack deal is Salesforce’s latest effort to keep pace with Microsoft Corporation MSFT.

“Slack, despite facing stiff competition from Microsoft, has been a clearly successful solution set further penetrating enterprises and thus looks like the natural fit for Salesforce to beef up its collaboration and messaging footprint and keep pace with Nadella & Co. with its cloud dominance,” the Wedbush analyst said. 

Change In Direction: The Slack deal “leaves more questions than answers,” said Raymond James analyst Brian Peterson. 

“We’re not clear on how CRM’s ownership of Slack is necessary, and previous indications of a more valuation sensitive approach to M&A didn’t prove accurate,” the analyst said. 

Piper Sandler analyst Brent Bracelin said Slack has “game-changer potential,” but investors have sticker shock from the $27.7-billion price tag.

“The biggest push-back we hear from investors has been the purchase premium at 24.4x CY21E EV/S and 19.4x CY22E EV/S and additional ~50M share dilution for a business that has not yet cleared the $1B revenue run-rate milestone,” he said. 

Needham analyst Scott Berg said the Slack deal could be a sign of things to come for Salesforce.

“We believe the Slack transaction signals a fundamental change that will now see CRM buying assets outside its core customer-centric platform, and that larger and more expensive deals will follow.”

Salesforce Ratings, Price Targets: Morgan Stanley has an Equal-Weight rating on Salesforce with a $275 target.

Morningstar has a Hold rating and $253 target.

Wedbush has an Outperform rating and $300 target.

Raymond James has a Strong Buy rating and a price target lifted from $255 to $280. 

Piper Sandler has an Overweight rating with a price target lowered from $285 to $278.

Needham has a Hold rating and no target.

CRM, WORK Price Action: Salesforce shares were down 7.72% at $222.71 at last check Wednesday, while Slack shares were down 1.94% at $42.98.