Is (CRM) THE Stock to Buy Before Earnings?

Customer relationship management technology provider Salesforce, Inc. (CRM) delivered earnings and revenue beat in the first quarter and raised its full-year 2024 earnings guidance. The company’s first-quarter revenue was $8.25 billion, an increase of 11% year-over-year and above $8.18 billion expected by analysts, according to Refinitiv.

CRM’s adjusted earnings for the quarter totaled $1.69 per share, up 72.5% year-over-year, compared to the $1.61 per share consensus among analysts polled by Refinitiv.

“Q1 represented another strong step forward as we accelerate our transformation and profitable growth strategy,” said Amy Weaver, CRM’s President and CFO. “Our team delivered another double-digit growth quarter on the top and bottom line as we help customers increase productivity, drive efficiency, and become AI-first companies.” She added.

The company is set to release its second quarter fiscal year 2024 results on Wednesday, August 30, 2023, after the market's closing. For the second quarter, CRM expects adjusted earnings of $1.89 to $1.90 per share and revenue of $8.51 billion to $8.53 billion. Analysts surveyed by Refinitiv projected $1.70 in adjusted EPS and $8.49 in revenue.

Following a solid first-quarter performance, CRM raised its earnings forecast for the 2024 full year but left its revenue forecast intact. The company expects adjusted earnings per share of $7.41-$7.43, compared to the prior guidance of $7.12-$7.14. Also, it calls for $34.70 billion in revenue for the fiscal year 2024.

Analysts polled by Refinitiv expect full-year adjusted earnings of $7.14 per share and revenue of $34.65 billion.

Marc Benioff, Chair and CEO of Salesforce, said that the company “significantly exceeded” its operating margin target for the first quarter. CRM is now expecting an adjusted operating margin of 28% for the 2024 fiscal year, an increase of 1 percentage point from the 27% forecast it provided in March.
“At the same time, we are leading the next major revolution in CRM — infusing trusted, secure generative AI across our entire product portfolio.

Salesforce's generative AI ecosystem wields Einstein GPT, Slack GPT, and Tableau GPT, delivering trusted power across our product portfolio. Our Salesforce GPT Trust Layer will shield customer data, enabling productive automation and intelligent enterprise enhancements securely,” Benioff added.
However, some challenges are being faced by CRM. Clients are looking carefully at deals that are taking longer to close than they were in the past, said Chief Operating Officer Brian Millham on a conference call with analysts. The company is now looking at how to automate the selling process on the low end of the market and make its salespeople more productive, he added.

During the first quarter, “our professional-services business started to see less demand for multiyear transformations and in some cases, delayed projects as customers focus on quick wins and fast time-to-value,” Millham said.

Despite these near-term challenges, shares of CRM saw strong returns Friday afternoon, sending the Dow Jones into positive territory. Moreover, CRM’s stock has gained close to 30% over the past six months and more than 55% year-to-date.

Here’s what could influence CRM’s performance in the upcoming months:

Rising Corporate Spending on Software

CRM sells software under a subscription model. The company’s software assists businesses in organizing and handling sales operations and customer relationships. Salesforce has expanded into marketing, e-commerce, and analytics.

According to the forecast by Gartner, worldwide software spending is projected to total $922.75 billion, an increase of 13.7% from 2022. The software segment will witness double-digit growth as enterprises boost utilization and reallocate spending to core applications and platforms that support efficiency gains, including customer relationship management (CRM) and enterprise resource planning (ERP) applications.

Therefore, growing enterprise spending on digital transformation projects remains a significant tailwind for CRM stock.

Positive Recent Developments

On June 29, CRM introduced generative AI capabilities for Sales Cloud and Service Cloud to transform how sellers and service teams work and interact with customers. Sales GPT and Service GPT would bring the power of secure generative AI and real-time data from Data Cloud to empower teams to close deals faster, anticipate customer needs, and boost productivity.

On June 12, Salesforce unveiled AI Cloud, bringing the trusted generative AI to the enterprise. AI Cloud is a suite of capabilities that would supercharge customer experiences and company productivity by bringing together AI, data, analytics, and automation to offer trusted, open, real-time, generative AI that is enterprise-ready.

AI Cloud also includes the brand-new Einstein GPT Trust Layer, which sets a new industry standard for trusted enterprise AI, providing the benefits of genitive AI while offering data privacy and data security. Customers such as AAA-The Auto Club Group, Guccu, Inspirato, and RBC US Wealth Management are noticing the value of CRM’s new AI-powered capabilities.

Also, in the same month, CRM announced Marketing GPT and Commerce GPT, combining generative AI with trusted, real-time data from Data Cloud, transforming how companies connect with their customers by personalizing every campaign and shopping experience. Customers like Rossignol are using Salesforce to drive personalization at scale with AI, data, and CRM.

Robust Financials

For the fiscal 2024 first quarter that ended April 30, 2023, CRM’s revenues grew 11.3% year-over-year to $8.25 billion, and its gross profit was $6.12 billion, an increase of 14.1% year-over-year. Its income from operations came in at $412 million, compared to $20 million in the prior year’s quarter.
Furthermore, the company’s non-GAAP net income was $1.67 billion or $1.69 per share, representing increases of 70.5% and 71.4% year-over-year. Its free cash flow rose 21.5% from the year-ago value to $4.25 billion.

Solid Historical Growth

Over the past three years, CRM’s revenue and EBIT grew at CAGRs of 20.9% and 168.5%, respectively. Its normalized net income increased at a CAGR of 176.6% over the same period. Also, the company’s total assets and levered free cash flow grew at 20.4% and 26.5% CAGRs over the same time frame, respectively.

Favorable Analyst Estimates

Analysts expect CRM’s revenue for the fiscal year (ending January 2024) to grow 10.5% year-over-year to $34.65 billion. The consensus EPS estimate of $7.45 for the ongoing year indicates a 42.2% year-over-year increase. Moreover, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

In addition, the company’s revenue and EPS for the fiscal year 2025 are expected to increase 10.9% and 21.2% from the previous year to $38.41 billion and $9.03, respectively.

Bottom Line

The global leader in CRM topped first-quarter revenue and earnings estimates and lifted its full-year 2024 earnings guidance. Analysts seem highly bullish about the company’s growth prospects as it is committed to bolstering its product offerings by incorporating generative AI.

Generative AI’s significant potential is expected to boost the company’s profitability and growth. As per a report by Bloomberg Intelligence (BI), generative AI is projected to become a $1.3 trillion market by 2032, growing at a CAGR of 42%. Moreover, increasing demand for AI products could add around $280 billion of new software revenue.

CRM, expected to report fiscal 2024 second-quarter results on August 30, 2023, will likely beat analysts’ revenue and earnings expectations, building on its solid business momentum.

Given CRM’s solid financial performance and promising growth prospects, it could be wise to invest in the stock before its upcoming earnings.