Salesforce stock (NYSE: CRM) experienced a significant drop of 21.6% on May 30th, starkly contrasting with the 1% decrease in the S&P 500. Meanwhile, Oracle (NYSE: ORCL), a peer in the industry, saw its stock fall by only 5% during the same period. This sharp decline for Salesforce followed the announcement of its first-quarter FY 2025 earnings, which missed revenue expectations and presented lower-than-anticipated guidance for Q2 and the full year FY 2025.
Current Financial Performance
Year-to-Date Performance
As of now, Salesforce stock is down 19% year-to-date, while the S&P 500 has risen by 10%. At its current price of $218 per share, Salesforce is trading 27% below its estimated fair value of $298, according to Trefis.
Historical Performance and Volatility
Over the past three years, Salesforce’s stock performance has been volatile:
- 2021: +14%
- 2022: -48%
- 2023: +98%
In comparison, the S&P 500 returns for the same years were 27%, -19%, and 24%, respectively, highlighting that Salesforce underperformed the S&P 500 in 2021 and 2022.
Revenue and Earnings Report
Q1 FY 2025 Results
Salesforce reported total revenues of $9.13 billion for Q1 FY 2025, marking an 11% year-over-year increase. This growth was primarily driven by a 12% rise in subscription and support revenues. Key sub-segments contributing to this growth included:
- Sales Cloud: +10%
- Service Cloud: +11%
- Integration & Analytics: +24%
Notably, Salesforce generates around 95% of its total revenues from subscription and support income. The company also saw a favorable decrease in operating expenses, leading to an operating margin of 18.7%, up from 5%. Overall, net income improved significantly from $199 million to $1.53 billion.
FY 2024 Performance
For FY 2024, Salesforce’s total revenues grew by 11% year-over-year to $34.9 billion, driven by a 12% increase in subscription and support revenues. The reduction in total expenses as a percentage of revenues led to an improved operating margin of 14.4%, up from 3.3%. Consequently, GAAP net income surged from $208 million to $4.14 billion.
Future Outlook
Looking ahead, Salesforce expects Q2 revenues to range between $9.20 billion and $9.25 billion. For FY 2025, we estimate Salesforce’s revenues to be approximately $38 billion. Additionally, the revenue per share is likely to increase to $37.59, which, coupled with a price-to-sales (P/S) multiple of 7.9x, leads to an estimated valuation of $298.
Market Challenges and Predictions
Macro-Economic Environment
Given the current uncertain macroeconomic environment, characterized by high oil prices and elevated interest rates, Salesforce might face challenges similar to those experienced in 2021 and 2022. The question remains whether CRM will underperform the S&P 500 over the next 12 months or if it will witness a strong recovery.
Investment Portfolio Performance
While individual tech stocks, including Salesforce, have shown volatility, the Trefis High-Quality Portfolio, consisting of 30 stocks, has consistently outperformed the S&P 500 each year. This portfolio has provided better returns with less risk, offering a more stable investment option in uncertain times.