Salesforce’s [CRM] share price has held a steady upwards trajectory so far this year but, since announcing better-than-expected second-quarter earnings in August, the stock has soared.
For the year-to-date through 10 September’s close, Salesforce’s share price has jumped 52% to $247.80. The stock is trading 114% above its 52-week low of $115.29, to which it fell during the market sell-off. Even more remarkable are the gains Salesforce’s share price has made since the company reported its Q2 2021 earnings on 25 August.
Salesforce’s share price started to climb in after-hours trading, opening more than 16% higher the next day, before reaching an all-time high of $272.32. This is in stark contrast to the way in which the market reacted following its Q1 2021 earnings beat, when Salesforce’s share price fell 4% in after-hours trading on 28 May.
So, what’s different this time around?
Salesforce’s share price benefits from remote working uptick
The latest quarterly earnings from the company shows once again that Software-as-a-Service (SaaS) companies have been big winners of the coronavirus pandemic.
However, looking at Salesforce’s first-quarter results, when the company posted revenue of $4.89bn and earnings per share (EPS) of $0.70, this wasn’t immediately reflected in its balance sheet. The results were marginally better than the $4.85bn in revenue and an EPS of $0.69 that Refinitiv data had predicted.
The company posted an operating loss of $140m compared to profit of $210m in the same quarter a year ago. The uptick in costs was partly due to Salesforce making a number of high-profile acquisitions in the last couple of years, including completing a deal for personalisation and customer data platform, Evergage, back in February.
During the three months to 30 April, it pledged to postpone any layoff decisions for 90 days in order to help its employees get through the coronavirus crisis.
Prior to the Q1 2021 earnings call, Yun Kim, a Rosenblatt Securities analyst, suggested that the company would see slowing revenue ahead. Salesforce has been enjoying year-over-year revenue growth of more than 20% for some time, wrote Kim in a research note seen by Barron’s, but “large scale business application deployment is becoming a lower priority among large organisations … large deal activity [will] slow down even after IT spending rebounds”.
He added: “Our industry checks prior to COVID-19 in late January indicated that the pace of large-scale business application deployment, including Salesforce-driven initiatives, was likely to slow meaningfully this year.”
“Our industry checks prior to COVID-19 in late January indicated that the pace of large-scale business application deployment, including Salesforce-driven initiatives, was likely to slow meaningfully this year” - Yun Kim, a Rosenblatt Securities analyst
In the note, Kim argued that the company’s target of delivering $35bn in revenue in fiscal 2024 might look overly optimistic to some. He assigned the stock a Sell rating and a price target of $120, which would represent a 51.6% drop from its current price as of close of trading on 10 September.
At the time of releasing Q1 2021 earnings, Salesforce’s guidance for the second quarter was revenue between $4.8bn and $4.9bn on an EPS of either $0.66 or $0.67. For the full fiscal year, the company estimated that it would deliver $20bn in revenue on an EPS of between $2.93 and $2.95.
Salesforce's estimated full fiscal year 2021 revenue
Adapting to the new normal
The Q2 2021 results delivered blew not only the company’s guidance out of the water but Wall Street away. Revenue was $5.15bn, 5% higher than the Wall Street consensus of $4.9bn and up 29% year-over-year. Meanwhile, earnings per share were $1.44.
Revenue for its Sales Cloud segment, which helps sales teams to track their businesses, came in at $1.28bn, up 13% year-over-year. Its Service Cloud segment, which helps in delivering cloud support, saw revenue of $1.3bn, up around 20% year-over-year. Meanwhile the Salesforce Platform and Other segments’ revenue of $1.51bn was up by a whopping 66% from Q2 2020. The latter included sales from data visualisation software Tableau, which was acquired for $15.7bn last year.
Following its earnings smash, Salesforce has updated its guidance for the full fiscal year. Total revenue has been revised upwards by a few percentage points to a range of $20.07bn to $20.08bn, while earnings per share are now expected to be in the range of $3.72 to $3.74.
Future revenue growth is likely to be boosted by the company’s Work.com tool, launched mid-way through the second quarter, which is designed to support businesses in bringing employees back to the office. The solutions that the platform offers includes contact tracing, employee wellness and shift management. The more offices that reopen, the more Salesforce stands to benefit from the tool.
Reacting to the Q2 2021 earnings report, Baird analyst Rob Oliver wrote in a note seen by Benzinga: “Clearly, COVID-19 has accelerated the digitization needs of global enterprises, and [Salesforce] is a go-to for companies to make mission critical investments to adjust to new normal.”
“Clearly, COVID-19 has accelerated the digitization needs of global enterprises, and [Salesforce] is a go-to for companies to make mission critical investments to adjust to new normal” - Baird analyst Rob Oliver
In adapting to the new normal, Salesforce announced 1,000 jobs would be cut during its Q2 2021 earnings call, equivalent to 2% of its workforce. Those employees affected will have 60 days to find new positions within the company.
“This means we’ll be redirecting some of our resources to fuel growth and areas that are no longer as aligned with the business priority will be de-emphasised,” Mark Hawkins, the company’s CFO, said on the call.
Baird’s Oliver has assigned the stock an Outperform rating and set a price target of $285. According to MarketBeat, Salesforce has been the recipient of a slew of upgrades since its earnings call. Of the ratings from the last 30 days, 33 are a Buy, three a Hold and two a Sell.
|PE ratio (TTM)||95.64|
|Quarterly Revenue Growth (YoY)||28.9%|
Salesforce share price vitals, Yahoo Finance, 11 September 2020