StockStory analysts argue that Salesforce presents a downside risk despite its recent outperformance, citing stagnating billings growth and a flat operating margin. While the stock has climbed to $239.80, a 28.7% increase over the past six months, the firm contends that the company's fundamentals do not support its current valuation.
The analysis highlights that Salesforce has beaten the S&P 500 by 19.8% in the last half-year. However, the firm points to non-GAAP billings, a metric often termed "cash revenue" because it reflects actual cash collected rather than recognized revenue, as a key indicator of underlying health. Salesforce’s billings reached $9.77 billion in the second quarter, with year-on-year growth averaging 11.2% over the last four quarters. The analysts describe this performance as underwhelming, suggesting that increased competition is creating challenges in acquiring and retaining customers.
Forward-looking data reinforces this caution. Sell-side analysts forecast Salesforce’s revenue to rise by 10.4% over the next 12 months. This projection is close to the company’s 13.3% annualized growth rate over the past five years but fails to show the acceleration typically required to boost valuation multiples. StockStory notes that this lack of top-line acceleration implies that newer products and services have not yet driven significant growth.
Profitability trends further complicate the investment case. The analysts prefer GAAP operating margin over adjusted profits because they view stock-based compensation as a legitimate expense for retaining talent rather than a non-cash item to be excluded. Salesforce’s trailing 12-month operating margin stands at 19.9%. The firm observes that this margin has remained generally stable over the last two years despite revenue growth. They argue that increased revenue should have provided leverage on fixed costs, resulting in better economies of scale and higher profitability. The lack of such improvement raises questions about the efficiency of the company’s expense base.
Despite these concerns, StockStory acknowledges that the stock's valuation is reasonable in isolation. However, they conclude that the combination of shakier fundamentals and a reasonable price creates too much downside risk for their standards. The firm recommends investors look elsewhere for opportunities, specifically pointing toward semiconductor "picks and shovels" plays rather than holding Salesforce.
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