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Shares of customer relationship management company, Salesforce (NYSE: CRM) are down over 6% in pre-market trading today. Salesforce announced its fiscal second quarter of 2023 (ended in July) results on August 24 after the market closed and reported revenue of $7.72 billion and adjusted earnings of $1.02 per share.
Analysts forecast Salesforce to report revenue of $7.69 billion and adjusted earnings of $1.19 per share. In the year-ago quarter, the company reported revenue of $6.34 billion and adjusted earnings of $1.48 per share.
In its press release, Salesforce Chair and Co-CEO Marc Benioff stated, “We had another strong quarter, with revenue of $7.7B growing 22% year-over-year and 26% in constant currency, showing yet again the durability of our business model.”
So, why is CRM stock price falling despite beating Wall Street consensus estimates in Q2? In Q3, Salesforce forecast sales between $7.82 billion and $7.83 billion, compared to consensus estimates of $8.07 billion. Its adjusted earnings forecast of $1.21 per share was also lower than estimates of $1.29 per share in Q3.
Further, in fiscal 2023, Salesforce estimates revenue of $31 billion and earnings of $4.72 per share, lower than consensus revenue and earnings estimates of $31.73 billion and $4.75 per share, respectively.
Let’s see what impacted Salesforce revenue in the July quarter.
Salesforce wary about a challenging macro environment
While Salesforce grew its top line by 22% year-over-year in Q2, it remains wary of the current macro environment, which is quite challenging. Benioff explained, “Sales cycles can get stretched, deals are inspected by higher levels of management, and all of this we began to start to see in July……Nearly everyone I’ve talked to is taking a more measured approach to their business. We expect these trends to continue in the near term, and we’ve reflected this in our guidance.”
Salesforce emphasized demand was slower from small and medium enterprises in regions such as North America and Europe, across verticals including retail, consumer goods, communications, and media.
From a product perspective, commerce and marketing saw pronounced decelerations while sales and service remained strong. For example, Salesforce’s service subscription and support revenue totaled $1.83 billion in Q2, rising 14% year-over-year. Further, revenue from the sales category increased 15% to $1.7 billion, while its Platform and Other Category (including Slack) surged 53% higher to $1.48 billion.
In Q2, Salesforce launched new marketing and commerce tools and completed the acquisition of Troops.ai, a company that developed a Slack chatbot that sales employees can use. Salesforce acquired Slack for $28 billion in 2022 and stated it would increase the subscription prices of the chat platform for the first time since 2014. It expects Slack to add $1.5 billion in sales this fiscal year.
What next for CRM stock and investors?
Salesforce stock is currently trading 45% from all-time highs valuing the company at $170 billion by market cap. Given Wall Street forecasts, Salesforce is valued at 5.4x forward sales and 28x forward earnings, which is quite steep.
But Salesforce believes its shares are undervalued and initiated its first-ever share repurchase program as it aims to touch $50 billion in annual revenue by fiscal 2026. Despite the ongoing weakness, Salesforce also reiterated guidance for an adjusted operating margin of 20.4% in fiscal 2023.
Analysts tracking CRM stock have a 12-month average price target of $243, which is 35% above its current trading price.