Salesforce Stock Price Caps at Critical Resistance Point, Offering a Potential Entry Opportunity
Salesforce CRM stock, while delivering strong Q2 earnings with improved guidance, is facing headwinds that are keeping its price capped at a critical resistance level. Despite robust long-term growth prospects driven by the global shift towards digitization and customer engagement, analysts believe the stock is poised for a dip, presenting a possible opportunity for new investors to enter the market.
Key Takeaways:
- Salesforce’s Q2 results, while surpassing expectations, show slowing growth: Revenue growth of 8.5% is down sequentially and compared to last year, with no significant acceleration anticipated in 2024.
- Margin improvement and robust capital returns: The company achieved record high adjusted and GAAP margins, leading to a double-digit increase in cash flow and free cash flow. This strong performance supports substantial stock buybacks, demonstrating commitment to shareholder value.
- The market is wary of slowing growth and a challenging September outlook: September is generally a volatile month for stocks, and concerns over macroeconomic conditions, rising inflation, and the upcoming FOMC meeting contribute to market uncertainty.
- A potential dip in price might present a favorable entry point: Despite the current headwinds, Salesforce’s long-term outlook remains optimistic, driven by its position as a leader in the rapidly evolving digital space.
Salesforce Growth Is Priced Into the Market
While Salesforce surpassed analysts’ expectations in Q2, two factors are limiting further gains. First, revenue growth has slowed, indicating a need for further market penetration. The company’s revenue grew 8.5%, down sequentially and compared to last year, with no anticipated acceleration in 2024. Second, analysts lowered their estimates throughout the quarter, setting the bar low and diminishing the perceived strength of the outperformance. Despite exceeding consensus by $0.1 billion (approximately 1%), the margin is considered slim for the market. Segmentally, growth was driven entirely by a 9% increase in Subscription Services, offset by a decline in Professional Services.
Despite the slowing growth, Salesforce delivered impressive margin improvements. The company widened its margins at all levels (GAAP and adjusted), with a 190-basis-point improvement in the reported operating margin and a 210-basis-point improvement in the adjusted operating margin. These margins, both adjusted and GAAP, reached record levels, driving double-digit increases in cash flow and free cash flow. Adjusted earnings also climbed 20%, exceeding consensus by 840 basis points.
While guidance is favorable, it presents another potential headwind for the market. Salesforce upgraded its guidance, forecasting 7% growth in Q3, but also predicted growth below the consensus figure, raising doubts about the full year. Although the full-year outlook was reaffirmed, expecting 8.4% growth in line with Marketbeat consensus, this provides no catalyst for higher share prices.
Cash Flow and Capital Return Will Sustain Value for CRM Stock
With growth slowing, attention now shifts towards CRM’s robust capital returns. Q2 results enabled substantial buybacks, sufficient to reduce the share count by 1.3% on average during the quarter. This momentum is expected to continue through the end of the year.
"Our capital return program remains a priority, and we now expect to more than fully offset our dilution from FY25 stock-based compensation," stated CFO Amy Weaver.
However, a looming risk for investors lies in the potential disruption from Artificial Intelligence (AI), the very source of Salesforce’s current strength. While Salesforce is a leader in providing essential SaaS services, there’s a growing trend for companies to build their own DIY solutions, fueled by the increased accessibility of AI technology. Companies like Klarna, for example, are preparing to abandon their Salesforce and Workday solutions, consolidating workloads internally into simpler, scalable platforms.
Salesforce Analysts Raise Targets: Upside is Limited
Despite the current headwinds and potential risks, Salesforce analysts are raising their stock price targets for Q3. However, the upside potential is limited. Some targets push the stock to new all-time highs, but the majority align with the consensus, which caps potential gains near the recent highs. While this price point, near $300, could be reached by year’s end, a lower entry point is likely to emerge beforehand. The market demonstrates significant resistance at the crucial $265 level, suggesting an impending downward move. The critical support target sits near $260; a breach of this level could send the stock down to $240, where strong support might emerge.
Despite the near-term challenges, Salesforce’s long-term prospects remain bright, propelled by the ongoing digital transformation and the increasing demand for customer-centric solutions. While a dip in price may be imminent, it’s a potential opportunity for new investors to capitalize on this robust company’s future growth.