Salesforce Inc. recently released its financials, revealing a slowdown in growth for the cloud software giant. This shift in momentum may prompt the company to explore alternative strategies to reignite growth.
In contrast to the steady revenue growth experienced over the past five years, with rates ranging from 24.9% in fiscal 2018 to 28.7% in 2020, Salesforce’s growth has now plateaued at 18.5% in fiscal 2023. Projections for fiscal 2024 indicate a further decline to just 11%. This trajectory aligns more closely with that of mature software companies rather than the rapid expansion typically associated with the thriving cloud sector, where younger hypergrowth companies like Snowflake are flourishing.
Despite initial expectations, Salesforce’s growth has fallen short. Bernstein Research analyst Mark Moerdler highlights, “The low double-digit growth we are seeing now and likely in the future is significantly down from what most investors expected even a year ago.” This reality necessitates a comparison of Salesforce with other established software companies based on various key metrics, including valuations.
In response to pressure from activist investors, Salesforce has shifted its focus towards profitability. The company’s adjusted operating margins have risen to 32.1% in the latest quarter, compared to 22.7% just a year ago, primarily due to cost-cutting measures such as job eliminations. While this indicates progress in terms of profit, Salesforce’s top-line performance remains lackluster.
Furthermore, the company anticipates challenges in achieving revenue growth going forward. Chief Operating Officer Brian Millham revealed that macroeconomic headwinds are impacting areas of the business, particularly professional services and the Slack enterprise-messaging platform.
In light of these circumstances, Salesforce may need to consider acquiring growth opportunities, a common strategy employed by maturing companies seeking to revitalize their prospects.
Salesforce’s Evolution and Growth
Early in its history, Salesforce made a series of small acquisitions, gradually paving the way for bigger deals in recent years. One notable acquisition was the purchase of Slack Technologies, a messaging platform, for nearly $28 billion in 2021. Another significant acquisition was Mulesoft in 2018, which experienced a remarkable 26% growth in the past quarter, according to analysts at Macquarie Research.
Although these acquisitions have contributed to increased revenue and growth for Salesforce, they have also introduced some challenges. The company has experienced disruption and management turmoil, with the departure of high-profile CEOs from these acquired companies. For instance, Stewart Butterfield, the co-founder of Slack, left the company in late 2020.
Despite concerns from some investors about potential slower growth or a return to a more active M&A program, Pat Walravens of JMP Securities considers Salesforce an attractive stock. In fact, he raised his price target and highlighted the company’s opportunities in AI, including its Einstein Copilot, Mulesoft, and the potential for more significant acquisitions.
AI presents a promising avenue for growth for Salesforce. While many software companies have emphasized AI, its direct revenue impact has not yet been fully realized on Wall Street. In contrast, hardware and chip companies that cater to AI data centers have witnessed revenue growth directly resulting from AI adoption.
Nevertheless, Chief Executive Marc Benioff assured analysts that Salesforce has undergone a complete transformation as it approaches its 25th anniversary. With its strong positioning for the AI revolution, the company has “completely rebuilt” itself.
However, despite these positive developments, Bernstein’s Moerdler pointed out that Salesforce’s multiples indicate it is now a mature software company. Interestingly, Salesforce’s growth rate is slower than that of Microsoft Corp. Moreover, its future growth prospects are comparatively lower, and its GAAP margins are about half of Microsoft’s. Surprisingly, despite these differences, the companies’ multiples on an EPS basis are quite similar.
Considering the current hype surrounding AI, it would not be unexpected for Salesforce to explore further acquisitions in the future. The potential opportunities in AI make this an enticing path for the company’s expansion.
Overall, Salesforce has come a long way and experienced significant growth. While challenges accompany their acquisitions, the company remains attractive and well-positioned to capitalize on the AI revolution. With the potential for more acquisitions and a focus on AI, Salesforce continues to be a key player in the technology industry as it enters its 25th year.