Salesforce Set to Rally After 'Epic Quarter'; Profitability Drive

Morningstar analyst Dan Romanoff sees the software firm at a ``truly seminal moment'' after the software firm boosted its margin targets and posted fourth-quarter results and full-year outlook exceeding expectations.

Lukas Strobl 2 March, 2023 | 10:20AM Jocelyn Jovene
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Salesforce Tower, San Francisco

Salesforce (CRM) shares soared 15% in U.S. pre-market trading on Thursday after the maker of business software announced strong results and a sweeping pivot towards profitability.

Its new goals eclipse margin targets set last September. Instead of targeting a 25% non-GAAP operating margin by 2026, Salesforce now guides for 27% in the current fiscal year. To get there, the company is ``more closely scrutinizing every dollar'' as it executes layoffs announced in January, cuts real estate spending and drives efficiency and automation, CEO Marc Benioff told analysts in a call

``The company's pivot toward profitability over the next two years was well beyond our expectations,'' Morningstar senior analyst Dan Romanoff wrote in a note on Thursday. Deeming the new margin targets achievable, Romanoff hiked his fair value on the stock from $220 to $245, a 46% upside from Wednesday's closing price.  ``Shares look attractive even after an aftermarket pop'' to about $194, he added.

In line with other growth-oriented tech stocks, Salesforce shares have gone through a punishing correction as monetary policy tightened. Its 48% decline during 2022 pulled in activist investors including Elliott Management and Starboard Value, who demanded a focus on profitability instead of growth through acquisitions. Wednesday's announcements clearly reflect this.

``We see the fingerprints of multiple activist shareholders all over the company’s results and guidance. The acceleration of margin improvement, the stressing of profitability on the earnings call, the expanded share buyback authorization, the slowdown in stock-based compensation in the future, the disbanding of the M&A committee, and the new board members are likely all the result of the multiple activist shareholders that have taken a stake in Salesforce over the last several months,'' Morningstar's Romanoff said. 

Elliott quickly voiced its approval of the announcements, but activist pressure isn't going anywhere-- in the same statement, Elliott lays out demands for better governance: ``Salesforce needs a sustainable leadership plan and a board that demonstrates it can provide accountability through proper oversight.''

This likely reflects unease about the line of succession beyond founder and CEO Marc Benioff (58) after co-CEO Bret Taylor left the company last November. 42-year-old Taylor, previously ``crown prince'' of the venerable software giant, has since founded an artificial intelligence startup. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Salesforce Inc247.35 USD-1.54Rating

About Author

Lukas Strobl  is the editorial manager for EMEA at Morningstar.

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