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Salesforce stock rallies 15% on rising profit guidance, defying the bear market

Posted: 2 June 2022 3:27 pm
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Is the stock a bargain buy as the company sees stronger earnings despite a tough US economy?

Shares of software company Salesforce (CRM) are on the rise Wednesday after the company reported top and bottom-line beats and raised its profit forecast for the year but reduced its guidance for revenue.

The stock opened higher Wednesday and topped US$184.42 per share within the first half hour of trading, before drifting lower. Salesforce was trading at US$178.10 per share at 2:28 p.m. EST on Wednesday.

Wednesday's rally suggests investors are impressed with the tech company's ability to grow profits and remain resilient in the face of uncertain economic conditions and rising costs.

The company's lower valuation may also be encouraging to bargain hunters seeking a long-term opportunity in this and other fallen tech stocks. Salesforce stock is down 43% from its 52-week high despite today's gain.

What happened?

Revenue for the first-quarter fiscal 2023 came in at US$7.41 billion, up 24% year over year and 26% in constant currency. This topped Wall Street consensus estimates of US$7.38 billion, according to MarketBeat. Subscription and support revenues grew 24% from the same period last year to US$6.86 billion. The company saw growth across all its business segments, driven by consistently strong demand.

"We're just not seeing any material impact on the broader economic world that all of you are in," Salesforce co-CEO Marc Benioff said on a conference call with analysts. That said, the company is still watching the economic data and is aware of the macroeconomic uncertainty.

"Salesforce has proven to be incredibly resilient based on this incredible business model we have … We've been through all kinds of dot-com crashes and recessions and financial crises and global pandemics and all of you have watched us go through every possible storm, but we continue to weather these storms through the power and strength of our model."

That model has helped position Salesforce to net US$42 billion in remaining performance obligations — future revenue the company has through contracts already in place.

"There is no greater measure of our resilience and the momentum in our business than the US$42 billion we have in remaining performance obligation, representing all future revenue under contract," said Benioff. "While delivering incredible growth at scale, we're committed to consistent margin expansion and cash flow growth as part of our long-term plan to drive both top and bottom-line performance."

Adjusted earnings for the quarter came in at US$0.98, down from last year's first quarter but above the US$0.94 analysts estimated.

Meanwhile, Salesforce executives increased their earnings forecast for the year. The company now expects full-year fiscal 2023 earnings in the range of US$4.74 to US$4.76, up from the US$4.62 to US$4.64 guidance provided in March.

The higher earnings guidance is "driven by continued focus on disciplined decision-making across the organization, and as a company, we are committed to continuing to improve profitability over the long-term," Salesforce President and CFO Amy Weaver said on Tuesday's call.

This comes as executives trimmed their revenue guidance for the year, citing foreign exchange volatility for the downward revision. Salesforce now anticipates revenue of between US$31.7 billion to US$31.8 billion, down from the US$32 billion to US$32.1 billion previously forecasted.

Thinking of buying Salesforce stock?

A flurry of analyst price target changes rolled in Wednesday despite the company's upbeat earnings guidance, suggesting analysts see current US market conditions continuing as a near-term headwind. Of the ten analysts that updated their price targets for Salesforce, eight lowered their targets, according to Benzinga. Only two analysts adjusted their targets higher.

Still, the stock currently has an average Buy rating from analysts with a US$264.99 average price target, representing 50% in further potential upside.

For investors hunting for bargain buys, Salesforce's decline in multiples over the past six months is likely attractive. But Wednesday's rally shouldn't fool investors that they're entirely out of the woods just yet.

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At the time of publication, Matt Miczulski did not own shares of any equity mentioned in this story.

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