Cutting Salesforce Stock’s Fair Value Estimate to $220 From $240; Demand Environment Not Improving

Salesforce Stock at a Glance

• Current Morningstar Fair Value Estimate: $240
• Salesforce Stock Star Rating: 4 Stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Positive

Salesforce Earnings Update

For its fiscal third quarter, Salesforce delivered modest upside relative to our revenue expectations and more meaningfully outperformed our margin estimate despite foreign currency headwinds that continue to worsen. Fiscal fourth-quarter guidance, however, was slightly shy of our model. Sales cycle elongation and deal size compression that began in July intensified this quarter, while management commented they expect these conditions to persist into next year. We lowered our estimates for fiscal 2024 in anticipation of a persistently challenging macro environment and then also made some minor related smoothing adjustments to our model. As a result, we are lowering our fair value estimate for wide-moat Salesforce to $220, from $240 previously. On the positive side, management stated the firm continues to build a healthy sales pipeline, and the company bought back 11 million shares for $1.7 billion. Salesforce remains one of our top software picks and we applaud the company’s increasing focus on margins along with the newly implemented $10 billion buyback program.

Little Impact Seen From co-CEO Resignation

Salesforce also announced co-CEO Bret Taylor was leaving the company for an entrepreneurial pursuit. We believe Salesforce has a deep bench given global operations, a massive sales organization, a leading engineering team, and a variety of leaders from acquired companies that the firm could elevate should it feel the need to do so. In the meantime, founder and co-CEO Marc Benioff remains at the helm, so there is little immediate change other than Salesforce once again does not have an immediate succession plan.

Revenue grew 14% year over year (19% in constant currency) to $7.84 billion, compared with FactSet consensus of $7.83 billion. Current remaining performance obligations, or CRPO, grew 15% year over year in constant currency, which lagged revenue growth for the fifth straight quarter, and further supports our downward estimate revisions.