Salesforce – CRM stock – has languished in eternal sideways mode for some time. Despite that, CRM stock may be a little rich considering the alternatives. This may push CRM stock lower. If CRM stock does move lower, and if Salesforce is then able to achieve its revenue goals for 2024, CRM stock could be a valuable addition to a portfolio. But, Salesforce would have to achieve its revenue goals and earnings goals. And, all of this during a period of time when the US economy could contract.
There are a few aspects of the financials for Salesforce that I like. The company appears to be cresting a hill where they could produce increasing profits. This is being done via economies of scale. Financial metrics are achieving those levels necessary to increase profits on a an ever-growing level, quarter after quarter.
But, the economy.
Projected revenue growth for both 2024 & 2025 are to continue increasing. This needs to come with caveats, however. The basis of my investing begins with the idea that all companies operate within an economy. With that in mind, the economy is likely to contract, if but somewhat. The Federal Reserve is being forced to raise interest rates because the economy is running at too full a speed. Inflation is sticky at higher levels. The Fed may have to raise interest rates more after having already raised rates at near-record pace over the past two years.
Likely, employment will decline in the US and with that, revenues to companies whether they be B2C or B2B. That contraction is likely to push Salesforce revenues downward – along with profits. While Salesforce shows they can produce ever-increasing revenue, during an economic downturn they are likely to have to retool. However, then it is a matter of buying a stock in a company that is performing within an economy that is turning downward. Afterward, once the economy turns back upward, should an investor buy on a big dip, this is the opportunity to go long and stay long.
Net margins for Salesforce are more than double the S&P 500 8.25% net margins. This is one of the reason that I continually push in to tech stocks as they outperform the rest of the broader economy. While Salesforce margins dipped somewhat in previous quarters, that dip was still well above the S&P 500 average. Investing in a company with strong margins means this is a company that enjoys high monopoly pricing power. Having strong pricing power – a monopoly kind of trait, this enables for the higher margins.
Earnings Per Share
Expectations for higher earnings in 2024 push the EPS up to $6.85 per share in 2024. I do not believe 2024 will enjoy an economy where Salesforce can produce these kinds of profits. I expect that the Fed is going to have to continue to push rates somewhat in order to get employment to ease and reduce pressure on inflation. Lower employment translates in to business shrinking payrolls and cutting costs because revenues decline. That translates in to reduced EPS for Salesforce and all other companies.
But, Salesforce proves that
In the meantime, even at $6.85 EPS for 2024, CRM stock is too rich. On a comparative basis, at $6.85 EPS, this equates a 3.301% yield off of the $207.41 CRM share price. The alternative is the 10-year US Treasury yield which is currently 4.875%. The risk is that the Fed raises interest rates higher by ~50 basis points more, driving the US 10 Year upward in yield, dropping price. But, the eventuality is that the Fed will be allowed to lower rates. So, the 10-year Treasury has a low risk ratio.
But, an investment in CRM at these levels is far riskier as assets classes adjust to higher interest rates. There is no justification to buy in with yields this high. If anything, an investor would want to wait to get in with a dip in the broader stock market.
For now, CRM stock is moving sideways after sliding from recent highs. I would be more interested in getting in to CRM at a price point well below the $130.00 printed in December 2022. If the economy does contract, and Salesforce were to then be able to bring in $5.00 EPS as the future earnings, an investor would want to see a price that brings this in line with a 5.00% yield. That means, you are looking to buy CRM stock at – or, below – $100.00 with an anticipation that a Salesforce that is rebounding – along with the US economy, pushes its EPS back up to $5.00. At that point, the yield on the investment is better than what would likely occur with US Treasury bonds. Keep in mind, the US Treasury market will likely see interest rates decline after an economic contraction. This is also the time when US equities would likely turn back upward.
I believe Salesforce is a strong company – perhaps not the strongest. But, if given a solid entry point, this is a company that could produce profits on an ever-increasing level.