9 Salesforce Analysts React to Q1 Earnings Beat: ‘Next Quality Software GARP Stock’

The Salesforce logo is seen at its headquarters in San Francisco, Calif., on Dec. 1, 2020. Stephen Lam/Getty Images

Salesforce Inc. shares jumped Wednesday morning after the company reported first-quarter earnings and raised its profit forecast.

On Tuesday, Salesforce reported adjusted first-quarter EPS of 98 cents on $7.41 billion in revenue. Both numbers beat consensus analyst estimates of 94 cents and $7.38 billion, respectively. Revenue was up 24 percent from a year ago.

Service Cloud revenue was up 17 percent to $1.76 billion in the quarter. Sales Cloud revenue was up 18 percent to $1.63 billion.

Salesforce also raised its fiscal 2023 adjusted EPS guidance from a previous range of between $4.62 and $4.64 to a new range of between $4.74 and $4.76. Salesforce cut its full-year revenue guidance from a prior range of between $32 billion and $32.1 billion to a new range of between $31.7 billion and $31.8 billion.

Margin Leverage

Bank of America analyst Brad Sills said Salesforce is becoming the “next quality software GARP stock,” meaning growth at a reasonable price.

“This stickier installed base gives us higher confidence in the company’s ability to drive meaningful margin leverage in the near and long term,” Sills wrote.

Wells Fargo analyst Michael Turrin said Salesforce’s improved margin outlook was a pleasant surprise.

“We keep our positive view on CRM shares and see room for a catch-up in performance given the established positioning/relative resilience of this platform, demonstrated progress towards continued margin improvement, and shares which are trading at 4.5x EV/S and 20x EV/FCF on our revised CY23 estimates,” Turrin wrote.

BMO Capital Markets analyst Keith Bachman said Salesforce shares have a compelling free cash flow valuation relative to the company’s growth, but the company is also facing longer-term risks associated with M&A and margin compression.

“The real stand out from the call was raising FY23 operating targets by 40 basis points, which we do not think was expected,” Bachman wrote.

Hiring Discipline

RBC Capital Markets analyst Rishi Jaluria said Salesforce’s fiscal 2023 margin guidance overshadows its revenue growth forecast cut.

“Management noted hiring is not paused, but rather occurring at a more measured pace following last year’s strong hiring (headcount grew 30 percent YoY),” Jaluria wrote.

JMP analyst Patrick Walravens said he sees some potentially attractive buyout targets for Salesforce.

“While Salesforce continues to say ‘right now, we’re not really looking at doing any major acquisitions…’ our point of view is that there are some really attractive M&A opportunities with companies like Zoom Video Communications (2023E EV/revenue of 5.3x & an enterprise value of $27.2B), DocuSign (2023E EV/revenue of 5.8x & an enterprise value of $17.2B) and Okta (2023E EV/ revenue of ~5.7x & an enterprise value of ~$13.5B) at the top of our list,” Walravens wrote.

Mizuho analyst Gregg Moskowitz said Salesforce’s operating margins and cash flow from operations were solid.

“We reiterate that CRM remains very well-situated to help its vast customer base manage revenue and process optimization via digital transformation,” Moskowitz wrote.

Bullish for Tech Stocks

Wedbush analyst Daniel Ives said Salesforce’s better-than-feared results are bullish for cloud and tech stocks.

“Last night Salesforce delivered a much better than feared April quarter and guidance which will be a major relief for tech investors showing that core enterprise demand is holding up well despite the macro and geopolitical swirls,” Ives wrote.

Raymond James analyst Brian Peterson said Salesforce’s ability to exceed expectations in the first quarter despite forex headwinds is a testament to management’s execution.

“While shares look inexpensive on an EV/sales basis (~4x our FY23 vs. the group at ~6x), we also note that the ~18.5x FY24 FCF should provide a more defined floor for investors in the current environment,” Peterson wrote.

Needham analyst Scott Berg said investment in digital transformation initiatives is showing no signs of slowing down.

“The company did lower FY23 revenue guidance by $300mm, though this is purely the result of FX headwinds as the company noted the current macro environment is not causing any material impact to demand,” Berg wrote.

Piper Sandler analyst Brent Bracelin said expanding margins and multi-cloud deals are helping insulate Salesforce from a challenging macroeconomic environment.

“While the cRPO outlook of 15 percent (vs. 21 percent last quarter) suggests the growth profile is not immune to FX headwinds and a tightening business cycle, CRM has a proven track record of navigating challenging environments,” Bracelin wrote.

Ratings and Price Targets:

• Bank of America has a Buy rating and $250 target.
• Wells Fargo has an Overweight rating and raised the price target from $225 to $235.
• BMO Capital Markets has an Outperform rating and lowered the price target from $260 to $225.
• RBC Capital Markets has an Outperform rating and $235 target.
• JMP has a Market Perform rating and $250 target.
• Wedbush has an Outperform rating and $225 target.
• Needham has a Hold rating.
• Raymond James has a Strong Buy rating and lowered the price target from $300 to $250.
• Piper Sandler has an Overweight rating and lowered the price target from $330 to $250.

By Wayne Duggan

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