Dow Jones Industrial Average component Salesforce now finds itself in the IBD 50 after a big turnaround in profitability. It is today's pick for IBD 50 Stocks to Watch.
The growth stock is in a flat base with a buy point of 225. The base was formed entirely above the 50-day moving average, which is positive action. Shares are now testing support at that level, according to IBD MarketSmith.
The growth stock has a strong Composite Rating of 97 and an EPS Rating of 98. The Relative Strength Rating of 88 is also good.
Salesforce struggled with declining earnings per share from the August-October 2021 quarter to the May-July 2022 period. EPS fell 19% to 27% in that stretch. But Salesforce came back with earnings gains of 10%, 100% and 72%.
Sales growth has tapered off in recent quarters, however. In the fiscal first quarter ended April 30, revenue of $8.2 billion was 11% higher than a year ago. That followed a slowing trend of 27%, 26%, 24%, 22%, 14% and 14% in the previous quarters.
Fiscal Q1 free cash flow grew 22% over the same period to $4.25 billion.
For the fiscal second quarter ending this month, the enterprise software company expects a 10% increase in revenue to $8.51 billion-$8.53 billion and 58% growth in earnings per share to $1.89-$1.90. For the full year, it announced a bullish outlook of 41% earnings growth to $7.41-$7.43 per share on sales of $34.5 billion-$34.7 billion — 10% growth from the previous year.
Analysts polled by FactSet see earnings of $1.90 per share on sales of $8.5 billion.
The Dow Jones component is in the enterprise software group, which holds a lofty 16th place among IBD's 197 industry groups. CRM offers a cloud-based platform for customer relationship management for industries including automotive, industrial, retail, energy and others.
Growth Stock Offers AI Feature
In a more recent strategy, Salesforce has started offering a generative AI sales and service feature to its customers.
According to Clara Shih, CEO of Salesforce AI, the company's AI-focused business group, generative AI has the ability to "automatically generate personalized responses for agents to quickly email or message to customers, freeing human agents to spend more time deeply engaging on complex issues and building long-term customer relationships."
However, the company has attracted activist investors, including Elliott Management, Starboard Value, ValueAct, Inclusive Capital and Third Point. While CRM stock has risen with increasing interest from these investors, the company also has to address their concerns about expense management. And that may lead to strategic decisions to support the stock's performance.
Operating margin during the first quarter was 27.6%, and the activist investors are likely interested in increasing that figure amid slowing revenue growth.
Generative AI features may help achieve that goal by allowing faster customer engagement. In June, Marc Benioff, Salesforce's CEO also observed that generative AI could "spark a massive new tech buying cycle."
CRM's recent acquisitions include Slack, a workplace collaboration platform, in 2021 for $27.7 billion and Tableau, a data analytics service acquired in 2019 for $15.7 billion.
Mutual funds own 48% of the growth stock. The JPMorgan Large Cap Growth Fund and the Fidelity Contrafund hold positions. Exchange traded funds that hold CRM include iShares Expanded Tech-Software Sector ETF and the Invesco Nasdaq Internet ETF.
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