Trading at multi-year lows, is Salesforce stock a buy?

In recent months, investors around the world have focused on the Federal Reserve’s aggressive monetary tightening policy – and specifically how the central bank’s efforts to stem high inflation could tip the US economy ( and others) in the recession. One of the side effects of the Fed’s actions is a historic appreciation in the value of the US dollar. This may be positive in some ways, but for multinational companies it significantly reduces the value of revenue from foreign markets.

It was a particular headwind for Selling power (RCMP -2.24%). After factoring in the negative impact of unfavorable currency fluctuations, the cloud software pioneer forecast a significant slowdown in revenue growth. For the current fiscal year, revenues are only expected to increase by 17%. If this forecast proves accurate, it will be the first time that Salesforce has recorded annual growth of less than 20%.

Given that, it should come as no surprise that the once top-flight stock was punished. But how much of this punishment is justified? If you think this year’s bear market has passed the Salesforce bar, this could be a fantastic opportunity to buy stocks.

Salesforce is still a growing company

The news from Salesforce that is catching investors’ attention is that management has lowered its full-year guidance quarter after quarter. In late spring, co-CEO Marc Benioff (unusually) deflated expectations by slightly lowering the revenue growth forecast for fiscal year 2023 (which ends in January 2023) to 20%. But after the fiscal second quarter update and another run-in with the strong US dollar, management lowered the full-year revenue growth forecast to just 17%. The company also announced its first-ever share buyback program, allowing up to $10 billion in buybacks.

Consensus ? Salesforce’s strong growth days are in the rearview mirror, and it’s time to treat it more like a value stock. Stock prices are down more than 40% so far in 2022. With the exception of March 2020 when pandemic shutdowns were put in place around the world, stocks are trading at their lowest levels since 2019.

However, while the quarterly reports garnered attention, many investors completely ignored the company’s annual Dreamforce developer and digital pros event in late September. During a keynote, Benioff and co-CEO Bret Taylor unveiled a new real-time customer data tool called Genie, designed to help businesses create personalized experiences on the spot, hoping to improve digital interactions to land, grow and retain customers.

Other products have been launched, from Web3 authoring capabilities to new Slack integrations across the entire Salesforce ecosystem. (Salesforce acquired the enterprise chat and communications company last year.) But beyond its internal developments, Benioff and company reaffirmed their commitment to growth and profitability. Salesforce remains on track to meet its long-standing goal of $51 billion in revenue for fiscal year 2026 (which largely matches the 2025 timeline). But Benioff also added a new goal: an adjusted operating profit margin of 25% by that year.

For reference, Salesforce expects its adjusted operating margin to be 20.4% this year.

Is this stock too cheap to ignore?

To help the company achieve these ambitious goals for growth and profitability over the next few years, Benioff is also not ruling out further acquisitions. Unlike his colleague specialist in “digital transformation” Adobe (NASDAQ: ADBE)which until recently — when it made its blockbuster $20 billion takeover of Figma — largely avoided aggressive acquisition activity, Salesforce hasn’t been shy about absorbing promising smaller peers.

This has been a controversial strategy as many of these acquisitions have been made by issuing new shares. But Benioff has had a pretty good track record of delivering strong shareholder returns based on free cash flow per share.

Data by YCharts.

Still, there’s always a chance that the next acquisition – assuming it’s coming soon – won’t go so well. At this point, investors need to assess whether the current valuation is worth it given the company’s growth rate assumptions (less than 20% per year) and profitability (adjusted operating margins rising from 20.4 % to about 25%). As of this writing, Salesforce is trading for less than 26 times its enterprise value to free cash flow – the “cheapest” it has been by this metric over the past decade.

For what it’s worth, Salesforce is also on track to be one of the worst performing stocks in the Dow Jones Industrial Average of 2022. As of this writing, only the embattled Intel (NASDAQ: INTC) is doing less well, down 47% since the start of the year.

But Salesforce is not Intel. Even in tough times, it’s still a growing business, the cloud industry as a whole continues to grow rapidly, and Salesforce is focusing more on managing profitability as it nears its goal of long-term revenues of over $50 billion. Based on his forecast for the next three years, this looks like a great buying opportunity to me.

Nicholas Rossolillo and his clients hold positions at Adobe Inc. and Salesforce, Inc. The Motley Fool holds positions and recommends Adobe Inc., Intel and Salesforce, Inc. The Motley Fool recommends the following options: Long January 2023 $57.50 calls on Intel, long calls of $420 in January 2024 on Adobe Inc., short calls of January 2023 of $57.50 on Intel and short calls of January 2024 of $430 on Adobe Inc. The Motley Fool has a disclosure policy .

Comments are closed.