Salesforce's Stock Plummets as Growth Outlook Dims
Investors have been given another reason to be cautious about the software sector's health, as Salesforce Inc. slashed its subscription revenue outlook and highlighted customers' tightened spending.
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, wrote Bernstein analyst Mark Moerdler. Despite maintaining an underperform rating, he raised 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 suggested that "investors will need to reset how they think about the company" and its growth prospects, as low- to mid-teens growth on a percentage basis no longer seems achievable.
Salesforce maintained its total revenue outlook for the fiscal year, projecting 8% to 9% growth, but reduced its subscription revenue forecast. Subscription and support revenue is now expected to see just under 10% growth, down from an anticipated 10% growth.
UBS analyst Karl Keirstead noted that the report will likely weigh heavily on software sentiment and confirm fears that the overall spending backdrop [year to date] has weakened. He maintained a neutral rating but lowered his price target to $250 from $310, citing broad market malaise rather than issues specific to Salesforce.
Guggenheim's John DiFucci echoed these concerns. He pointed out risks in the subscription revenue guidance, which assumes a significant uptick in new annual contract value (ACV) growth in the second half of fiscal 2025. DiFucci's estimates suggest about 8% growth in subscription revenue, potentially leading to a downward revision in total revenue unless offset by Professional Services revenue. He also maintained a neutral rating on the stock.
Evercore ISI's Kirk Materne offered a more optimistic perspective. He believes Salesforce kept its fiscal year revenue guidance unchanged due to pipeline visibility and favorable pricing tailwinds in the second half. Materne acknowledged the recent quarter's softness and investors' lack of confidence in the new outlook but highlighted Salesforce's focus on margin expansion and free cash flow growth. He holds an outperform stance with a $300 target price on Salesforce shares.
Emily Bary
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05-30-24 0752ET
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