Salesforce Shares Dropped After Guidance Failed to Meet Expectations

This is not investment advice. The author has no position in any of the stocks mentioned. has a disclosure and ethics policy.

Salesforce (NYSE:CRM) shares are showing volatility in after-hours trading as the company announced a revenue and profit beat for their fiscal third quarter. The company reported adjusted earnings of $0.75 per share on revenue of $4.5 billion beating estimates from analysts by $0.09 per share and the expected $4.45 billion in revenue. The stock price initially fell after the market close but has since recovered about half of the drop. In addition to the beat on earnings, the company has also tightened its guidance for the year.

According to company estimates, the revenue for the year is expected to come in at the $16.99 to $17 billion range, slightly higher than the estimates from the analysts following the company of $16.9 billion.  What looked disappointing to traders, however, was the weak forecasted guidance provided by the firm. The company has matured in its core business and is now seeing slowing growth so it has turned in a different direction to continue its goal of doubling the size of the company’s revenues by 2024. For the fiscal fourth quarter, Salesforce management announced that they are expecting adjusted earnings of $0.54 to $0.55 per share and have forecast revenue of $4.74 to $4.75 billion compared to the estimates from analysts of $0.61 and revenue of $4.74 billion.  

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Since Salesforce is facing declining growth to growing revenue it is turning to good old mergers and acquisitions (M&A) to continue the goal of growing revenue to meet its 2024 target.  Back in August, the company announced that it had purchased the data analytics company Tableau for $15.3 billion, which was the largest acquisition to that point. It had purchased MuleSoft for $6.5 billion the year prior with other smaller purchases as well. The company currently holds a market cap of about $142 billion, with a trailing P/E ratio well into the triple digits of 135.448 the company is priced for expected growth. 

One area for concern for the company going forward is it they will be able to maintain the forward momentum they have built in the event of a market downturn.  While so far markets have resisted any signs of a recession it is a certain eventuality. While Salesforce does have a high market cap currently, in the event of a recession, any pressure to growth would see that P/E multiple drop precipitously. The company does have current liabilities of about $10.4 billion which is an improvement over the Jan 2019 previously reported by the company of $11.25 billion while it also has cash and other cash equivalents of about $6.5 billion to offset this somewhat.

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