Salesforce Inc. is expected to benefit from a resurgence in enterprise spending as the spread of COVID-19 eases and businesses return to projects that had been put on hold because of the pandemic, but a big acquisition leaves a question mark.
is scheduled to report fiscal first-quarter results Thursday after the close of markets, and Cowen analyst J. Derrick Wood said the quarter was one of the best reads on the company “we’ve seen in some time.”
Last quarter, the company topped $20 billion in annual revenue for the first time, and set a new goal of $25 billion. Based on a survey of about 30 Salesforce partners, Wood said 81% have met or beat their business targets, well above the 55% average and 63% read from the fourth quarter.
“Partner checks cite deals & projects that were put on hold are now re-emerging, and we saw a big Q/Q drop in partners highlighting COVID-19 as having a negative impact on deal activity (i.e. notable decreases headwinds from churn, delayed decision-making & budget constraints),” said Wood, who has an outperform rating and a $290 price target.
One issue with the results, however, is that Salesforce is still trying to finalize the $27.7 billion acquisition of Slack Technologies Inc.
that it announced late last year. Wedbush analyst Daniel Ives wrote this week that Salesforce is “in the penalty box due to the Slack deal,” “which has created a dark black cloud around the stock given this M&A poker move.”
Ives said that the deal for Slack was a necessity for Salesforce to develop into a true competitor with software titan Microsoft Corp.
however, and also noted that the business was strong during the quarter.
“Our checks point to a broader acceleration in digital transformation initiatives such as enterprise CRM, as companies focus on this area of spend heading into the next 12 to 18 months,” wrote Ives, who has an outperform rating and $300 price target on the stock.
What to expect
Earnings: Of the 40 analysts surveyed by FactSet, Salesforce on average is expected to post adjusted earnings of 88 cents a share, up from the 76 cents a share expected at the beginning of the quarter, and the 70 cents a share from a year ago. Salesforce forecast 88 cents to 89 cents a share. Estimize, a software platform that uses crowdsourcing from hedge-fund executives, brokerages, buy-side analysts and others, calls for earnings of 99 cents a share.
Revenue: Wall Street expects revenue of $5.89 billion from Salesforce, according to 35 analysts polled by FactSet. That’s up from the $5.72 billion forecast at the beginning of the quarter, and $4.87 billion from a year ago. Salesforce predicted revenue of $5.88 billion to $5.89 billion. Estimize expects revenue of $5.99 billion.
Stock movement: Over the company’s fiscal quarter, Salesforce shares advanced 2%, while the iShares Expanded Tech-Software Sector ETF
has gained 4%, the S&P 500 index
has surged 13%, the tech heavy Nasdaq Composite Index
has advanced 7%, and the Dow Jones Industrial Average
— which added Salesforce as a component last year — has rallied 13%.
What analysts are saying
Citi Research analyst Tyler Radke, who has a neutral rating and a $250 price target, also sees a better-than-forecast quarter from Salesforce, but warned of some seasonal weakness.
“We expect a return to normalized levels of top-line beat/raises in Q1, as we see signs of steady front-office spending initiatives but with the caveat of increasingly weaker Q1 seasonality,” Radke said. “At a high level, we believe investors will continue to be concerned around the M&A/ lack of profitability narrative, with Slack acquisition still pending and the potential dilutive margin impacts here.”
J.P. Morgan analyst Mark Murphy, who has an overweight rating, noted that how Salesforce’s story develops depends on the Slack acquisition.
“We expect to see consistent trends overall and note that any positive surprise with cash flow upside in Q1 could be a particularly helpful catalyst,” Murphy said. “In some ways the narrative is in a bit of a holding pattern until the acquisition of Slack closes, but Salesforce is differentiated in that it is a strategic advisor to the C-Suite and able to provide the most complete Customer 360 vision.”
Of the 45 analysts who cover Salesforce, 36 have buy or overweight ratings and nine have hold ratings, with an average price target of $275.34, according to FactSet data.