Salesforce Stock Falls After Q3 Earnings: Analysts React To Conservative Guidance, Mulesoft Headwinds

Salesforce.com, inc. (NYSE: CRM) shares fell Wednesday after the company missed expectations with its fourth-quarter guidance.

Salesforce reported third-quarter adjusted EPS of $1.27 on revenue of $6.86 billion. Both numbers exceeded consensus analyst estimates of 92 cents and $6.8 billion, respectively. Revenue was up 27% from a year ago.

Sales Cloud revenue was up 17% to $1.54 billion in the third quarter. Service Cloud revenue was up 20% to $1.66 billion.

Looking ahead, Salesforce guided for fourth-quarter revenue of between $7.22 billion and $7.23 billion, slightly above analyst estimates of $7.22 billion. However, Salesforce also guided for fourth-quarter EPS of between 72 cents and 73 cents, missing analyst estimates of 81 cents.

Salesforce also said current President and COO Bret Taylor will join Mark Benioff as co-CEO.

Related Link: Nordstrom Analysts Break Down Q3 Earnings: 'Ongoing Market Share Loss'

Morgan Stanley's Salesforce Thesis Intact: Morgan Stanley analyst Keith Weiss said a narrow cRPO beat and modest fiscal 2022 guidance hike from Salesforce fell short of market expectations.

“However, the core thesis around accelerating FY23 FCF growth remains intact with organic cc bookings growth near 20% and margin expansion still on the table,” Weiss wrote.

Piper Sandler analyst Brent Bracelin said Sales Cloud growth in the third quarter was its highest in more than three years.

“Margin expectations reflect digestion of additional Slack expenses and continued growth investments being made ahead of a broadening pipeline of FY23 opportunities,” Bracelin wrote.

BofA Says Salesforce Guidance Conservative: Bank of America analyst Brad Sills said Salesforce’s cRPO guidance is likely conservative.

“Mulesoft softness is likely to be proven temporary, given strong pipeline and ‘clear actions’ already taken, expected to generate a rebound in Q4,” Sills wrote.

JMP analyst Patrick Walravens said there may be a subtle reason for Salesforce’s conservative guidance.

“It occurs to us that Salesforce might want to leave a bit of extra potential upside in F4Q for Mr. Taylor’s first full quarter as Co-CEO,” Walravens wrote.

Wedbush analyst Daniel Ives said guidance may have fallen short of expectations, but it was still solid.

“We believe this is a conservative outlook as CRM continues to juggle a number of organic growth initiatives, digesting Slack into the mix, while trying to push operating margins higher,” Ives wrote.

RayJay Sees Attractive Salesforce Valuation: Wells Fargo analyst Michael Turrin said Mulesoft experienced some unexpected headwinds tied to scaling.

“Despite some moving pieces in FQ3, we maintain our positive stance on CRM given a favorable backdrop for front oce software, renewed margin focus and a more palatable valuation backstop (<7x EV/S, 30x EV/FCF CY23e AH),” Turrin wrote.

Raymond James analyst Brian Peterson said it’s surprising how negative the initial market reaction was to a modest miss on fourth-quarter cRPO guidance.

“We’re cognizant that a ‘shoot first’ mentality often reigns supreme in choppy markets, although we’d encourage investors to use this as a buying opportunity for a stock that trades at just 9x our CY22 revenue estimate (vs. the 20-30% growth group at 12x),” Peterson wrote.

Needham analyst Scott Berg said Salesforce’s guidance will likely limit near-term upside for the stock.

“Updated FY23 guidance was consistent, but not quite at the ‘Rule of 40’ level we believe investors require to drive meaningful outperformance in CRM shares,” Berg wrote.

Salesforce Ratings, Price Targets:

• Bank of America has a Buy rating and $360 target.
• Morgan Stanley has an overweight rating and $360 target.
• Wells Fargo has an Overweight rating and $340 target.
• JMP has a Market Outperform rating and $350 target.
• Raymond James has a Strong Buy rating and $340 target.
• Wedbush has an Outperform rating and $315 target.
• Needham has a Hold rating.
• Piper Sandler has an Overweight rating and $365 target.