CA - Salesforce: Entering The Single Digit Club (Rating Downgrade)

2024-05-31 12:40:11 ET

Summary

• Salesforce's stock price dropped nearly 20% after mixed Q1 FY2025 results and weak revenue guidance.
• The company's growth outlook has been muted, projecting single-digit revenue growth for the first time in history for both Q2 and FY2025.
• The significant slowdown in bookings and backlogs growth indicates sluggish demand, despite the presence of Generation AI tailwinds.
• The potential acquisition of Informatica adds uncertainty to the stock's near-term performance.
• Despite margin expansion and the capital return program, the post-selloff justifies the current valuation only if the AI-related products have not materially boosted revenue outlook to double digits.

Investment Thesis

Salesforce ( CRM )'s price crashed by almost 20% after earnings due to mixed Q1 FY2025 results and disappointing forward guidance. Although the management is optimistic about long-term growth opportunities related to AI products, the company's growth outlook has been muted, projecting single-digit revenue growth ever in history for both 2Q and FY2025. In my previous article , I discussed CRM's trade-off between top-line growth and margin expansion. However, given the current backdrop of the AI frenzy, the fact that the company lowered the growth outlook disappointed investors as the stock was approaching an all-time high early this year....

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