Pain for Salesforce Today: Gains for Investors Tomorrow?

Salesforce CRM stock price is capped at a critical resistance point and may not set new highs soon. The Q2 results are great, including improved guidance, but the market must overcome headwinds. Among them are slowing growth, macroeconomic conditions, and the oh-so-tricky September trading outlook. September is a tough month for stocks, typically highlighted by volatility, if not lower prices, and there is ample risk with the FOMC and inflation in focus. 

The takeaway for investors is that CRM shares will likely move lower soon, providing a more attractive entry for new money because the long-term outlook remains robust. The global shift to digitization and lean into customer engagement drives business. We live in a world where digitization is the key to unlocking efficiency and profitability, and business is good, providing ample cash flow sufficient to pay dividends and repurchase shares while investing in growth. 

Salesforce Growth Is Priced Into the Market 

Salesforce. com had a better-than-expected quarter, but two things are capping gains following the results. The first is that revenue growth of 8.5% is down sequentially and compared to last year, with no hope of accelerating in 2024. The second is that analysts steadily lowered their estimates during the quarter, setting the bar low, so the outperformance isn't as strong as it could be. As it is, results are $0.1 billion ahead of consensus or about 1%, which is a slim margin. Segmentally, growth is due entirely to a 9% increase in Subscription Services offset by a decline in Professional. 

The margin news is the best of the report. The company widened its margin at all levels, GAAP and adjusted, delivering a 190-basis-point improvement in the reported operating margin and a 210-basis-point improvement in the adjusted operating margin. The adjusted and GAAP margins came in at record levels, driving a double-digit increase in cash flow and free cash flow and a 20% increase in adjusted earnings, 840 bps above consensus. 

Guidance is favorable but provides another headwind for the market today. The company improved its guidance, calling for 7% growth in Q3, but forecasted growth below the consensus figure, raising doubts about the full year. The full-year outlook was reaffirmed, expecting 8.4% growth in alignment with the consensus reported by Marketbeat, providing no catalyst for higher share prices. 

Cash Flow and Capital Return Will Sustain Value for CRM Stock

With growth slowing, CRM investors focus on robust capital returns. The Q2 results allowed for substantial buybacks, sufficient to reduce the count by 1.3% on average for the quarter, and strength is expected to continue through year's end. 

"Our capital return program remains a priority, and we now expect to more than fully offset our dilution from FY25 stock-based compensation" says CFO Amy Weaver. 

The risk for investors is that AI, Salesforce's very source of strength today, which provides businesses with a staggering amount of computing power, may lead to its demise. The company is a leader in SaaS services needed by businesses, but businesses will soon be able to do it in the DIY style. Companies like Sweden-based Klarna are preparing to shut down their Salesforce and Workday solutions because internal efforts are consolidating the workloads into a simpler, easier-to-use-and-scale format. 

Salesforce Analysts Raise Targets: Upside is Limited

Salesforce analysts are raising stock price targets in Q3, but the upside is limited. While several new targets put the stock at a new all-time high, the bulk aligns with the consensus, which caps gains near the recent highs. That price point, near $300, may be reached by the year's end, but a lower entry point will likely be reached beforehand. The market shows significant resistance at the critical $265 level and is set to move lower. The crucial support target is near $260; a move below there could take this stock down to the $240 level, where support is strong. 

The article "Pain for Salesforce Today: Gains for Investors Tomorrow?" first appeared on MarketBeat.