Salesforce's weakness becoming more apparent could lead to a significant decrease in stock value, a trend not witnessed in many years
Salesforce's shares plummet as investors reassess its potential for growth.Investors seeking further reasons to exercise caution regarding the software sector's health have just received a significant one, with Salesforce Inc. revising its subscription revenue forecast downwards and highlighting increased scrutiny on customer spending.
The implications of Wednesday afternoon's earnings report could result in a drop in Salesforce shares (CRM) not witnessed in years. The stock has fallen by 15.7% in premarket trading on Thursday, and if these losses persist during the regular session, it would mark Salesforce's most substantial single-day percentage decline since March 16, 2020, when the stock dropped by 15.9%.
"We have consistently expressed skepticism regarding the underlying drivers of the business moving forward, including their core strategies and their ability to capitalize on the AI opportunity, which the market appeared optimistic about," stated Bernstein analyst Mark Moerdler, who maintained an underperform rating on the stock while raising his price target to $234 from $231.
"In light of this quarter's results, with the stock down -16% in after-hours trading, we believe the weaknesses in the business are becoming increasingly apparent," Moerdler added.
He emphasized that "investors will need to reassess their perceptions of the company" and its growth potential now that the possibility of low- to mid-teens percentage growth no longer seems feasible.
Salesforce has upheld its total revenue forecast for the fiscal year, anticipating 8% to 9% growth, although it has revised its subscription revenue outlook. Subscription and support revenue are now projected to grow slightly below 10%, compared to the previous expectation of around 10% growth.
The report is expected to have a significant impact on software sentiment and validate concerns about the weakening spending environment so far this year, according to UBS analyst Karl Keirstead.
Keirstead believes that the current challenges are not specific to Salesforce but are widespread, and he does not anticipate a recovery in the second half of the year.
Additionally, there is a slight risk of further adjustments, as Salesforce did not explicitly attribute weakness in April to the remainder of the fiscal year, Keirstead pointed out. He maintained a neutral rating on the shares but reduced his price target from $310 to $250.
John DiFucci of Guggenheim shares a similar perspective, expressing concerns about subscription revenue guidance and the need for a significant increase in new annual contract value growth in the second half of fiscal 2025.
On the other hand, Kirk Materne of Evercore ISI is more optimistic, believing that Salesforce's decision to maintain its revenue guidance for the fiscal year indicates positive visibility into the pipeline and favorable pricing trends in the second half.
Materne acknowledges the challenges faced in the latest quarter but sees Salesforce as a unique player in the software industry, focusing on margin expansion and free cash flow growth. He has an outperform rating and a target price of $300 on Salesforce shares.