Salesforce (CRM) Faces Neutral Outlook as Valuation Struggle Sours Investor Sentiment

Business Insider

a day ago

Being a leader in a sector with a vast addressable market comes with significant challenges. For Salesforce (CRM), as a dominant player in customer relationship management (CRM) software, maintaining its leadership position while continuing to grow organically has long been a key objective to support its high valuation multiples.
Confident Investing Starts Here:
Easily unpack a company's performance with TipRanks' new KPI Data for smart investment decisions
Receive undervalued, market resilient stocks right to your inbox with TipRanks' Smart Value Newsletter
However, over the past six months, this dynamic has begun to show signs of strain. Organic growth, which once demonstrated steady strength, has started to slow, reflecting both market maturity and increasing competition. As a result, investors, who previously viewed Salesforce as a reliable option for consistent growth and expanding margins, are adopting a more cautious outlook.
Furthermore, the pressure to justify high valuations has prompted the company to adopt strategies such as mergers and acquisitions (M&A). This move also signals that Salesforce may be struggling to deliver significant organic growth in the short to medium term.
So, I think the real challenge now is figuring out how much of this slowdown is already priced into the stock and whether there's room for positive surprises that could shift the cautious sentiment. From my perspective, with little to no margin of safety at current prices, I'm taking a neutral stance on Salesforce.
Salesforce Isn't Slipping or Soaring
A big part of the bullish case for Salesforce is that the CRM giant has a strong moat thanks to its large corporate customer base. These customers are difficult to replace due to the platform's complexity and scale. While acquiring these customers can be costly, maintaining and retaining them is relatively cheap, which has helped Salesforce's margins improve over time. Currently, Salesforce's gross margins sit at 77%, compared to a five-year average of 74.5%.
That said, growth has slowed as the company has gotten bigger. In the company's first-quarter earnings report, released at the end of May, revenue declined from the previous quarter for the first time since 2019, reaching $9.83 billion. The high end of the revenue guidance for FY2026 is $41.3 billion, which implies a growth rate of approximately 9%. The market consensus, however, is slightly more optimistic, expecting growth of around 10.6% for the year.
From my perspective, given Salesforce's modest returns over the past twelve months compared to the broader market, it's clear that the AI-driven growth story hasn't yet sparked a new cycle of organic growth. Salesforce just recently announced an $8 billion acquisition of Informatica to boost its AI data foundation. The market tends to see Salesforce's return to acquisitions as a sign it's struggling with organic growth. Plus, Informatica itself isn't exactly a high-growth company—it's growing in the single digits but with solid margins.
So, it seems Salesforce's AI strategy is more about defending its customer base and preventing losses to competitors, rather than being a game-changing innovation with a clear competitive edge.
Winning by Scale, But Not Immune to Pressure
Even with its strong competitive moat, Salesforce is no longer the only option for enterprises. The Customer Relationship Management (CRM) space has become increasingly crowded, with competition coming not only from established giants but also from companies that initially served small and medium-sized businesses and are now expanding into the mid-market. I'm thinking specifically of HubSpot (HUBS) and monday.com (MNDY).
At the top end of the market, Microsoft's (MSFT) Dynamics 365 and Oracle (ORCL), through its CX/ERP solutions, have expanded their offerings to cover the entire customer sales cycle, going head-to-head with Salesforce in the corporate space. While each company still has its own value propositions in specific niches, it's clear that their product lines are overlapping more and more, which intensifies direct competition.
In the long run, this increased competition is likely to continue, but it may not prevent Salesforce from maintaining its leadership position in corporate CRM. However, it could limit its pricing power and put pressure on profit margins. For now, consensus estimates expect Salesforce to grow its EPS by about 17.5% annually over the next five years. That's a solid pace, but still a bit slower than the roughly 20% compound annual growth rate (CAGR) Salesforce has delivered over the past five years.
Valuations and the Question of Margin Safety
On one hand, investors are evaluating Salesforce in the context of broader digital transformation trends, particularly in AI, and the company's ability to maintain a premium position as the leading provider of CRM software. According to current market consensus, Salesforce's revenue is projected to grow at a compound annual growth rate (CAGR) of 9.8% over the next five years, which is notably slower than the 16% CAGR it achieved over the previous five years.
If operating margins remain stable at 20.2% through FY2025, and assuming the CRM market continues to grow, Salesforce seems focused on maintaining steady margins, with some support from inorganic growth. Should operating margins improve in line with the projected five-year EPS growth of 17.5% CAGR, this would imply an annual expansion of operating margins by approximately 1%.
By the end of the forecast period, revenue is expected to reach $60.1 billion, with operating margins advancing to the mid-twenties. Based on historical capital expenditures (CapEx) and depreciation and amortization (D&A) data, excluding distortions from past Mergers and Acquisitions (M&A) and Related amortization, I estimate that the adjusted free cash flow to the firm (FCFF) in five years would be approximately $15.3 billion.
Discounting this at 8.4%, which seems reasonable given the current high risk-free rate and a 4% equity risk premium, and applying a 3% terminal growth rate (on the optimistic side), the resulting equity value is approximately $228 billion. This represents a decrease of roughly 12% from Salesforce's current market capitalization of around $260 billion.
Given this relatively modest growth outlook, there doesn't appear to be a clear margin of safety in the current investment thesis.
Is Salesforce a Buy, Sell, or Hold?
Wall Street remains generally bullish on Salesforce. Out of 47 analyst ratings over the past three months, 34 are bullish, ten are neutral, and three are bearish. Furthermore, the consensus price target indicates significant upside potential: CRM's average stock price target is $348.49, implying ~28% in potential upside over the coming year.
Current Valuation Lacks a Clear Margin of Safety
Despite increased competition and a slowdown in Salesforce's core growth and margin expansion, the company's story still has many positive aspects. From its dominant market position to its stable and predictable financial performance, Salesforce has demonstrated its ability to thrive even in challenging macroeconomic conditions, making it an attractive stock for investors.
However, despite the stock's recent underperformance, I don't believe there is a clear margin of safety at current valuation levels. Therefore, I think a more substantial pullback—perhaps back to the $240 range, last seen in April—could present a more favorable entry point.