Customer relations software maker Salesforce, Inc.’s (CRM) EPS beat analyst estimates in the third quarter of fiscal 2022 by 14.5%, while its revenue was $3.41 million higher than the consensus estimate. CRM’s President and CFO, Amy Weaver, said, “We delivered another quarter of double-digit top and bottom-line growth. In this time of economic uncertainty, we remain committed to profitable growth and consistent operating margin expansion.”

For fiscal 2023, the company updated its guidance. It expects revenue to come between $30.90 billion to $31 billion, representing an increase of 17% year-over-year and 20% in constant currency. Its non-GAAP operating margin was raised from 20.4% to 20.7%. In addition, it expects non-GAAP EPS of $4.92 to $4.94, up from $4.71 to $4.73 projected earlier.

CRM expects its total addressable market size to surpass $290 billion by 2026, growing at a CAGR of 13%. It expects revenues of $50 billion for fiscal 2026 and an adjusted operating margin of 25%. Management expects the company’s international share of annual recurring revenues (ARR) to reach 37% by the end of fiscal 2023.

Earlier this year, the company announced cutting down 10% of its workforce and reducing some office space to become more profitable.

On January 22, 2023, hedge fund Elliott Management took a significant stake in CRM. Elliott’s stake comes after activist investor Starboard Value took a significant stake in the company last year.

Wall Street analysts said Elliott Investment Management and Starboard Value would urge the company to cut more jobs, change the board, and spin off to drive higher profits.

CRM’s stock has gained 27.5% in price over the past month and 3.2% over the past three months to close the last trading session at $165.09. Wall Street analysts expect the stock to hit $189.09 in the next 12 months, indicating a potential upside of 14.5%.

Here’s what could influence CRM’s performance in the upcoming months:

Mixed Financials

CRM’s total revenues increased 14.2% year-over-year to $7.84 billion for the third quarter ended October 31, 2022. Its gross profit increased 14.5% year-over-year to $5.75 billion. In addition, its cash and cash equivalents, end of the period, increased 27.8% year-over-year to $6.08 billion.

On the other hand, the company’s net income declined 55.1% year-over-year to $210 million. In addition, its EPS came in at $0.21, representing a decline of 55.3% year-over-year.

Favorable Analyst Estimates

CRM’s EPS for fiscal 2023 and 2024 are expected to increase 3.5% and 17.5% year-over-year to $4.95 and $5.81, respectively. Its revenue for fiscal 2023 and 2024 is expected to rise 17.2% and 10.5% year-over-year to $31.05 billion and $34.31 billion, respectively.

Strong Historical Growth

CRM’s revenue has grown at a 24.1% CAGR over the past three years and a 24.9% CAGR over the past five years. Its EBITDA has grown at a 1.7% CAGR over the past three years. Its total assets and levered FCF have grown at 22.5% and 21.8% CAGRs over the same period.

Mixed Valuation

In terms of forward non-GAAP P/E, CRM’s 33.37x is 68.1% higher than the 19.86x industry average. Likewise, its 21.56x forward EV/EBITDA is 56% higher than the 13.82x industry average.

However, its 2.74x forward P/B is 33% higher than the 4.08x industry average.

Mixed Profitability

In terms of the trailing-12-month EBIT margin, CRM’s 1.64% is 74% lower than the 6.32% industry average. Its 2.47% trailing-12-month Capex/Sales is 1.8% lower than the 2.51% industry average.

On the other hand, its 30.62% trailing-12-month levered FCF margin is 311.2% higher than the industry average of 7.45%. In addition, its 72.69% trailing-12-month gross profit margin is 47.2% higher than the industry average of 49.37% industry average.

POWR Ratings Show Promise

CRM has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. CRM has a C grade for Value, in sync with its mixed valuation.

It has a C grade for Quality, consistent with its mixed profitability. Favorable analyst estimates to justify its B grade for Sentiment.

CRM is ranked #27 out of 138 stocks in the Software - Application industry. Click here to access CRM’s Growth, Momentum, and Stability ratings.

Bottom Line

CRM is trading above its 50-day and 200-day moving averages of $142.71 and $161.37, respectively, indicating an uptrend. The company topped the consensus revenue and EPS estimates in the third quarter despite the macroeconomic challenges. CRM has also raised its guidance for fiscal 2023. Moreover, new investors buying stakes in CRM could force the company to undertake further cost-cutting measures to drive higher profitability.

Given its solid growth prospects and favorable analyst estimates, it could be wise to buy the stock now.

How Does Salesforce, Inc. (CRM) Stack up Against Its Peers?

CRM has an overall POWR Rating of B, equating to a Buy rating. You might also want to consider investing in the following Software - Application stocks with an A (Strong Buy) or B (Buy) rating: Commvault Systems, Inc. (CVLT), IBEX Limited (IBEX), and Magic Software Enterprises Ltd. (MGIC).

CRM shares fell $0.84 (-0.51%) in premarket trading Friday. Year-to-date, CRM has gained 24.51%, versus a 5.84% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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