Salesforce.com Earnings Beat Wall Street Estimates But Slack Acquisition Steals Thunder

Salesforce.com Inc, an American cloud-based software company, reported better-than-expected profit in the third quarter of the fiscal year 2021 with revenue increasing 20% year-over-year to $5.42 billion, but shares plunged over 4% in extended trading on news of Slack acquisition.

The company reported GAAP net income of $1.08 billion, or $1.15 per share, compared with a loss of $109 million, or 12 cents per share a year ago. Adjusted earnings came to $1.74 a share. That higher than the market consensus for earnings of 75 cents per share and revenue of $5.25 billion.

“Wide-moat Salesforce reported strong results, including a meaningful upside to both revenue and non-GAAP EPS, while guidance for the fourth quarter was mixed. Stealing the thunder from fine results was the formal announcement that the company is acquiring Slack, and this dominated the earnings call. We have mixed feelings on the Slack acquisition,” said Dan Romanoff, equity analyst at Morningstar.

“We are maintaining our fair value estimate of $253 for Salesforce as good organic results are offset by the seemingly modest deleterious impact on shareholder value arising from the Slack acquisition. With the recent pullback, we think Salesforce shares are looking increasingly attractive,” Romanoff added.

Salesforce’s shares closed 1.81% lower at $241.35; traded over 4% lower at $231.50 in extended trading on Tuesday. However, the stock is up about 50% so far this year.

Salesforce Stock Price Forecast

Eighteen equity analysts forecast the average price in 12 months at $291.53 with a high forecast of $325.00 and a low forecast of $234.00. The average price target represents a 20.79% increase from the last price of $241.35. From those 18 analysts, 15 rated “Buy”, three rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $275 with a high of $332 under a bull-case scenario and $187 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the enterprise cloud computing solutions leader’s stock. Raymond James raised their target price to $280 from $255.

Several other analysts have also upgraded their stock outlook. Salesforce.com has been given a $275 price target by The Goldman Sachs Group. The brokerage currently has a “buy” rating on the CRM provider’s stock. Bernstein restated a “neutral” rating and set a $234 price target. Barclays boosted their price target to $315 from $264 and gave the stock an “overweight” rating.

Analyst Comments

“While Salesforce.com (CRM) remains one of our best secularly positioned names given enterprise IT spend prioritized towards digital transformation, we see current valuation reflective of long-term share gains within an estimated $175 billion TAM over the next 4 years and >$200 billion longer-term,” said Keith Weiss, equity analyst at Morgan Stanley.

“We see total revenue nearly doubling by FY24, but at CRM’s current scale and market cap, an increasing focus on FCF and earnings is likely necessary for further price appreciation. Our Equal-weight view on CRM shares is based on our $275 PT, which is based on 30X our CY25e FCF per share of $12.07, discounted back at 8.5%,” Weiss added.

Upside and Downside Risks

Risks to Upside: Slack Connect becomes a powerful contributor to net new customer additions. Net dollar retention rate stabilizes as new COVID-19 customers begin to meaningfully expand – highlighted by Morgan Stanley.

Risks to Downside: Competition from Microsoft, which offers a similar product for free to Office 365 users; Difficulty expanding outside of the IT department; Organizations defer to a bundled alternative (MSFT Teams, Google Workspace) in a weaker macro.

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