Will acquisitions and cloud growth lift the Salesforce share price?

Salesforce stock has been buffeted by higher inflation and budget squeezes in the pandemic, but increased digitalisation and innovation and the role of its software in times of economic uncertainty should help its fourth-quarter figures.

Salesforce [CRM] is set to report a 24.3% increase in year-over-year revenues but a 29.8% decline in earnings per share when it reports its fourth-quarter results on 1 March.

According to analysts at Zacks Equity Research, Salesforce will announce revenues of $7.32bn and earnings per share of $0.73.

Salesforce expects total revenues between $7.224bn and $7.234bn and earnings of between $0.72 and $0.73 cents per share.

The main growth driver has been increased demand from businesses undergoing digital transformation, particularly as the pandemic has accelerated the shift to cloud solutions. Its software-as-a-service based platforms have seen a surge in popularity as a result of the work from home and online learning trend.

Salesforce’s focus on AI and progress in its Einstein Analytics platform and acquisitions are likely to have also helped its top line. The company completed its acquisition of Slack Technologies — which provides a messaging and communications app for businesses — in July 2021 for nearly $28bn. Additionally, last January it paid $570m to buy cloud consultancy platform Acumen Solutions.

Its Customer 360 Truth platform, which helps build a single Salesforce ID for customers, is likely to have been a boost, according to Zacks. However, a decline in software spending by small and medium-sized businesses in the pandemic may have impacted its performance. “Also increasing investments in international expansion and data centres might have eroded the company’s profitability in the quarter,” Zacks said.

Despite the positives, the Salesforce share price has fallen from $309 in early November to $210 in early 28 February trading. Investors have been concerned about a slowdown in demand and high inflation and interest rates given its $207bn valuation.

Salesforce versus Microsoft Dynamics

According to market intelligence firm IDC, as reported by The Motley Fool, Salesforce controlled around 24% of the global CRM market in the first half of 2021. It was followed by Oracle with 5.5% and Microsoft and SAP on 5% each. They are all part of a much bigger pie, with the CRM analytics market set to record a CAGR of around 13.1% between 2019 and 2027 in a Research Nester report, according to MarketWatch.

Microsoft Dynamics looks to be the biggest competitive concern for Salesforce. According to a Motley Fool report, Dynamics 365 revenue climbed 48% year-over-year in the first quarter of fiscal 2022 and 45% in the second quarter. This, the report said, was double the growth of Salesforce.

Salesforce is trying to stay ahead of the game through innovations such as teaming up with Amazon Web Services [AMZN] to deliver a direct-to-consumer streaming media solution to customers. It is also planning a dedicated cloud platform for NFTs, though employees have reportedly expressed opposition to its ambitions.

Q3 performance failed to cheer Salesforce stock

In its third quarter Salesforce reported earnings per share of $1.27, up 27% year-over-year and ahead of forecasts of $0.92. Its revenues came in at $6.86bn, up 27% and beating forecasts of $6.80bn.

Sales Cloud, its core product to help clients track sales leads and opportunities, saw sales climb 17% to $1.54bn, with Service Cloud business up over 20% to $1.66bn.

“No other software company of our size or scale is really performing at this level,” CEO Marc Benioff said on an analysts’ call, as reported by CNBC. “We know that because we’re talking to other cloud CEOs every day.”

“No other software company of our size or scale is really performing at this level” – Salesforce CEO Marc Benioff

The Salesforce share price, however, dropped 12% after the announcement when it said Q4 earnings would fall between $0.72 and $0.73 per share, compared with analyst expectations of $0.81.

Salesforce’s role in economic uncertainty is key

Analysts will pour over the figures to see whether economic uncertainty, particularly among SMEs, is hitting demand for its cloud services. Any more information on its NFT cloud service and the mixed reaction to its plans from employees will also be of interest.

Analysts will be keen to hear more about the group’s Einstein Analytics plans and the tie up with AWS in terms of long-term revenues and earnings boosts.

Overall, the outlook is optimistic, with 49 analysts polled by MarketScreener giving the stock a consensus ‘buy’ rating and a target price of $311 — an upside of 47.7% on the 28 February closing price.

Goldman Sachs analyst Kash Rangan is a fan, stating that Salesforce “remains poised to be one of the most strategic application software companies in the $1trn total addressable market cloud industry”, according to The Fly.