Salesforce’s ‘increasingly visible’ weakness could spur a stock drop not seen in years

By Emily Bary

Salesforce’s stock sinks as the company has investors rethinking its growth outlook

Investors searching for more reason to be cautious about the health of the software sector just got a big one, as Salesforce Inc. cut its subscription revenue outlook and discussed heavy spending scrutiny on the part of customers.

The puts and takes from Wednesday afternoon’s earnings report could mean a decline Salesforce shares (CRM) haven’t seen in years. The stock is down 15.7% in premarket trading Thursday, and if those losses carried through to the regular session, they would represent Salesforce’s largest single-day percentage drop since the stock fell 15.9% on March 16, 2020.

See more: Salesforce’s stock tumbles as earnings provide latest dose of software-sector pain

“We have said for some time that we remain skeptical about the fundamental drivers of the business going forward, including both their core initiatives and their potential to monetize the AI opportunity, which the street seemed bullish on,” Bernstein analyst Mark Moerdler wrote as he kept an underperform rating on the stock, while boosting his price target to $234 from $231.

“After this quarter’s results, with the stock down -16% in the aftermarket, we think the weakness in the business is becoming increasingly visible,” Moerdler added.

He said that “investors will need to reset how they think about the company” and its growth prospects now that the potential for low- to mid-teens growth on a percentage basis no longer seems viable.

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Salesforce maintained its total revenue outlook for the fiscal year, which calls for 8% to 9% growth, though it cut its subscription revenue outlook. Subscription and support revenue is now expected to come in slightly below 10% growth, whereas Salesforce previously was looking for about 10% growth.

The report “will likely weigh heavily on software sentiment and confirm fears that the overall spending backdrop [year to date] has weakened,” added UBS analyst Karl Keirstead.

From his perspective, “the malaise is broad, not Salesforce-specific, and we don’t see evidence of a [second-half] recovery.”

There is also “some (not material) risk of another trim, as Salesforce didn’t explicitly drag weakness in the month April across the reminder of the fiscal year,” Keirstead noted, as he maintained a neutral rating on the shares but cut his price target to $250 from $310.

Guggenheim’s John DiFucci took a similar view.

“We see risk in subscription revenue guidance as it implies significant uptick in new [annual contract value] growth in the [second half of fiscal 2025],” he wrote.

His assumptions are for “more reasonable new ACV growth for the rest of the year,” and that implies roughly 8% growth in subscription revenue. “This will likely result in downward revision to total revenue, unless Salesforce is able to offset it with Professional Services revenue, as it just did,” DiFucci noted.

He has a neutral rating on the stock.

Evercore ISI’s Kirk Materne was more optimistic. Salesforce “will get zero credit for keeping the [fiscal year] revenue guide intact today, but we believe the company kept it unchanged for a reason – notably visibility into pipeline and favorable pricing tailwinds” in the second half, he wrote.

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Materne said there was “no way to explain away” softness in the latest quarter or to give investors total confidence that the new outlook is “de-risked,” but he said Salesforce is unlike other software plays in that it’s “essentially a margin expansion/[free-cash-flow] growth story at this point.”

He has an outperform stance and $300 target price on Salesforce shares.

-Emily Bary

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05-30-24 0752ET

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