Not only is the ground in the San Francisco Bay Area saturated, but so is the cloud market pioneered by Salesforce Inc. and on top of margin pressure and lower quality earnings, one analyst downgraded the stock of the customer-relations management software giant.
On Wednesday, Bernstein analyst Stacy Rasgon downgraded Salesforce
to underperform from market performance because it has fallen into “growth purgatory.”
“Salesforce has been a controversial name for the last year as growth slowed and the company started to focus on margin,” Rasgon said. “Management guided to hit $50B in revenue and PF operating margins of 25%+ for FY26. But pressure has increased for larger margin improvements, while growth has continued to slow and the company has missed expectations.”
“The core of our thesis is that growth has been decelerating for years, but the deceleration has been masked by acquisitions,” Rasgon said. Salesforce’s most recent big acquisition was its acquisition of Slack Technologies, which closed on July 21, and last month, Salesforce said Slack co-founder and chief executive Stewart Butterfield was leaving the company.
“With the tailwinds from M&A no longer enough, core markets approaching cloud saturation, competition increasing, and macro issues hitting growth, management is aggressively pivoting to driving margins,” Rasgon said. “But the cuts are going to negatively impact efficiency, growth, and customer/employee satisfaction. Margin improvement will be less than expected in our view, and will appear over multiple years.”
Last week, Salesforce announced a 10% reduction to its workforce and pulled back on office space and other initiatives to drive “profitable growth” while reducing operating costs. However, Rasgon said those “margin improvements take time to take effect and are likely going to be much less than the Street expects.”
“Comparing the valuation of Salesforce against peers we find that Salesforce is overpriced, as it has a similar growth rate to peers but lower margins and lower quality earnings,” Rasgon said. “With a lot more pain ahead for Salesforce and numerous catalysts that may drive a lower multiple, we drop our rating to underperform.”
Of the 50 analysts who cover Salesforce, 38 have buy-grade ratings, 10 have hold ratings, and one has a sell rating, along with an average target price of $188.90.
As recently as July, 90% of analysts covering Salesforce had a buy-grade rating on the stock, but over the rest of 2022, that steadily dropped to 76%, according to FactSet data.