Shares of Salesforce.com (NYSE: CRM) are still down sharply compared to the 2021 all-time high, but the stock can easily regain those levels. A combination of factors, including position, results, guidance, valuation, cash flow, share repurchases, and the analysts suggest this stock will retest the all-time high and may even set a new 1. The question now is how long the market will take to get there.
Salesforce.com Results Blow Past Consensus
Salesforce.com had a solid quarter underpinned by rising prices, new technologies, and its leadership position in CRM. It’s no coincidence the company’s stock ticker matches its industry because Marc Benioff and Salesforce.com revolutionized the practice and brought it into the modern world. Now, Salesforce.com is leaning hard into AI-powered services and has established itself as the leading AI CRM platform.
The company’s Q2 revenue grew by 11.4% because of the company’s strength. This aligns with other enterprise software firms, but Salesforce.com is several times larger than many of its closest competitors. Hence, its 11.4% growth matches the annual revenue of some stocks in the enterprise software group. Growth was driven by Subscription and Support, the core business, at 12% and offset by a slower service department advance.
Among the many good details in the report is leverage. The company widened its margin more than expected due to sales leverage and reduced spending. That left the adjusted operating margin at 31.6% for the quarter and led the company to raise guidance. Guidance for revenue and margin were increased to levels above the consensus targets, leading the analysts to readjust their targets for the quarter, the year, and the following year.
Salesforce.com is Undervalued at 28X Earnings
Salesforce.com trades at a relatively high 28X earnings compared to the S&P 500. However, the S&P 500 is not growing and widening its margin the way that Salesforce.com is, and Salesforce.com’s smaller peers trade at higher valuations with slowing growth. Looking to next year, Salesforce.com's P/E falls to 24X the consensus and the consensus is too low.
Assuming the company remains on its current trajectory, the valuation relative to the current stock price could fall into the mid-teens within the next 5 years while producing solid cash flow, paying down debt, and repurchasing shares. Established tech such as Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Adobe (NASDAQ: ADBE), and Palo Alto Networks (NASDAQ: PANW) are all trading at 30X earnings or higher, suggesting CRM can sustain a similar high valuation. In this light, the company will only have to grow earnings at 10% CAGR, below consensus, for earnings growth to get the stock to a new all-time within the next 3 years.
The Analysts And Institutions Are Driving Salesforce.com Higher
Analysts like what they see. Marketbeat.com’s tracking tools picked up 10 analyst revisions within the first 12 hours of the report and are all bullish. There were no upgrades, but the stock is already pegged at Moderate Buy. However, there were 10 upward price target revisions ranging from $220 to $280, lifting the entire market.
The new range compares well to the broad consensus of $229, trending higher than last month and last quarter. The consensus implies a 7% upside, but the new high and several other fresh targets have the stock trading in the range of $275 to $280, just below the all-time high at $311.75. Another quarter or 2 of solid results and the range of leading targets will be at or above that level.
Regarding the institutions, their activity spiked in Q3, with buyers outpacing sellers by nearly 3:1. They now own about 77% of the stock, and their holdings are growing. Their activity is also consistent with a solid support target; the price action in CRM pulled back to the 150-day EMA in Q3, resulting in a bounce from a critical level confirmed with the post-release action.
The next major hurdle will be resistance at $230. If the market can get above there, a move up to the $250 to $280 range is next. A move to the all-time high looks likely but may take some time. The catalysts to do it may come with the Q3 and Q4 reports later this year.