“M&A tailwinds are no longer enough,” Bernstein analyst Rasgon said
Not only is the San Francisco Bay Area saturated, but so is the cloud market pioneered by Salesforce Inc. In addition to lower margins and lower quality revenue, one analyst said customer relationship management software has lowered the stock price of the giant.
On Wednesday, Bernstein analyst Stacey Rasgon downgraded Salesforce (CRM) to underperforming the market, citing “growth purgatory”.
“Salesforce was a controversial name last year as growth slowed and the company began to focus on margins,” Rasgon said. We have led the company to deliver a PF operating margin.However, growth continues to slow and the company is underperforming expectations, while pressure is mounting for a significant improvement in margins.”
“The core of our argument is that growth has slowed over the years, but that slowdown is masked by acquisitions,” Rasgon said. Salesforce’s most recent major acquisition was that of Slack Technologies, which closed on July 21st, and last month, Salesforce announced that Stewart Butterfield, co-founder and CEO of his Slack company. said to leave.
“With M&A tailwinds no longer sufficient, core markets approaching cloud saturation, increased competition, and macro issues impacting growth, management has aggressively focused on improving margins. We are doing it,” said Rasgon. “However, the cuts will have a negative impact on efficiency, growth and customer/employee satisfaction. In our view, margin improvements will be less than expected and will emerge over several years.”
Last week, Salesforce announced a 10% headcount reduction, shrinking office space and other initiatives to drive “profitable growth” while reducing operating costs. However, Rasgon said these “improved margins will take time to take effect and are likely to be much less than Street expects.”
“If you compare Salesforce’s valuation to its peers, you’ll see that Salesforce is growing at similar rates to its peers, but with lower margins and lower quality revenue, it’s overpriced,” said Rasgon. I’m here. “Additional pain lies ahead for Salesforce, and we are lowering the rating to Underperforming due to a number of factors that could lower the multiple.”
Of the 50 analysts covering Salesforce, 38 buy, 10 hold, 1 sell, with an average target price of $188.90.
In July, 90% of analysts covering Salesforce gave the stock a Buy rating, but that figure will steadily drop to 76% by the end of 2022, according to FactSet data. I was.
Read: Cloud software is a ‘fight for knives in the mud’ and Wall Street struggles with the one sector it was winning
Over the past 12 months, Salesforce stock is down 36.9%, iShares Expanded Tech-Software Sector ETF (IGV) is down 29.4%, Global X Cloud Computing ETF (CLOU) is down 33.5%, and First Trust Cloud Computing ETF is down 33.5%. It fell 33.5%. (SKYY) fell 40.7% while WisdomTree Cloud Computing Fund (WCLD) fell 46.9%. Meanwhile, over the past 12 months, the Dow Jones Industrial Average is down 6.3%, the S&P 500 is down 15.8% and the Nasdaq Composite is down 27.9%.
Salesforce shares fell 1.7% in the session to close at $144.90, the Dow Jones Industrial Average rose 0.8%, the S&P 500 rose 1.3% and the Nasdaq rose 1.8%.
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