Salesforce Q2 Earnings Preview: Potential Outperformance Amid Shareholder Rewards

Salesforce Earnings Preview: The Newfound Maturity Is Richly Rewarding Shareholders (CRM)

While the stock has recovered from its bottom, there is still ample room of multiple expansion given the current valuation. Salesforce (NYSE:CRM) offers one of my favorite suites of products thanks to its AI CRM platform. Everyone knows about its steady revenue growth, which has more than tripled from $10.5B in FY2018 to $34.9B in FY2024, making it the leader in the industry. In addition, Salesforce ended FY2024 with $56.9B in remaining performance obligations, which is a strength of the business. However, only recently the company switched to profit mode at the request of several activist investors, achieving a 30.5% operating margin. This has caused Salesforce's cash flows to jump exponentially in recent years, with $10.2B in operating cash reported at the end of FY2024 (+44% YoY). When a growth company reaches the scale to turn into a cash-generating machine, investors face the hard task of estimating future cash flows and - as a consequence - what the correct valuations may currently be. Moreover, Salesforce's numbers are among the most promising cloud and AI plays, which are surely seen as two main growth drivers for the next decade. That Salesforce's revenue growth has always been on a reliable path is something widely known. However, this didn't drive the bottom line of the company up, with many investors becoming concerned about Salesforce's use of capital which made its earnings almost non-existent until recent years. We all know Salesforce spent a lot of money on acquisitions (Slack, for example). But things changed when Salesforce was circled by activist investors, such as Elliott Management and Starboard Value, because its profitability was not growing or, even better, exploding. Marco Beniof, co-founder and CEO, eventually addressed the issue and announced in its FY2023 letter to shareholders that the company was switching gears and focusing on profitability. Guess what happened? In a few quarters, Salesforce's operating margin and free cash flow exploded, quickly painting a new picture for the company. So, the stock quickly recovered to its ATHs above $300. But then, when the company reported its Q1 2025 earnings with an EPS beat and a revenue miss of $20M (with revenues up 10.7% YoY to $9.13B), the stock plummeted over 20% because of "weak" guidance, maintaining a revenue forecast between $37.7B and $38B (8%-9% growth YoY) and expecting the non-GAAP operating margin close to 32.5%. Moreover, one of Salesforce's most important KPIs - remaining performance obligation (RPO) - Salesforce ended its Q1 with $53.9B, up 15% YoY. This represents the revenues under contract that are in the pipeline for the company. As such, it is of utmost importance because it helps us feel the pulse of Salesforce's future. The number released by the company pleases investors. However, some analysts were disappointed as they considered this a sign of slowing growth. Salesforce's Q1 earnings also carried one big change: the company paid its first quarterly dividend of $0.40 per share (a total of $388M), coupled with a huge buyback that made Salesforce's return to its shareholders over $2.5B in a quarter. So, the fact that Salesforce is now a dividend payer can attract a new cohort of investors. Surely, there won't be high-yield seekers. But those focused on dividend growth can consider Salesforce a nice bet for the future. The company's fwd dividend yield is 0.61%, but its payout ratio is just below 4.5%, leaving a lot of room for nice boosts to the dividend thanks to Salesforce's strong cash generation. Salesforce's balance sheet is superb. The company has almost $10B in cash and another $7.7 in short-term investments while carrying only $8.43B in LT debt. Most of it was taken in 2022 with rather low rates and, since then, the company has already paid down over $2B. Salesforce's retained earnings increased rapidly, showing yet another sign of strength. As a result, Salesforce runs with no leverage and a net debt negative position of $4.3B. No wonder, Moody's recently upgraded the company's credit rating to an A1. What does this mean? First of all, Salesforce is in great health. Secondly, in the case of new M&A, the company has multiple options before itself. Thirdly, the company might also choose to leverage its expanding balance sheet by taking on new debt (once rates are lower) to foster some extra shareholder returns. As many companies do, Salesforce ended its Q1 earnings call with its expectations for Q2, the one we are about to see reported. On revenue, Salesforce expects a range from $9.2 billion to $9.25 billion, which would be up 7% to 8% YoY. RPO growth in Q2 should be +9% YoY. GAAP EPS is expected to be in the range of $1.31 to $1.33 and non-GAAP EPS of $2.34 to $2.36. But one key driver we should keep in mind to understand how Salesforce is leveraging its strengths is this: thanks to its CRM, Salesforce manages more than 250 petabytes (1,024 TB or 1,048,576 GB or 10^15 bytes, meaning a petabyte can store half a trillion pages in .docx format or similar) of customer data. As we move into AI, having such a massive amount of data is critical to being successful. As Marc Benioff explained during the call, Data Cloud is a big business (bold is mine): The second key point is we've rebuilt the way that we are delivering a foundation of data for our customers. Why is that so important? Because we have now rearchitected all of our apps and all of our capabilities to fuel and fund this Data Cloud, it means that our customers going forward, are going to be able to take this Data Cloud and leverage that into their future capability and growth, especially profitability and productivity. And that is where our whole company and I think our whole industry, is eventually going to go. Not every company is as well positioned as you know for this artificial intelligence capability of Salesforce because they just don't have the data. They may say they have this capability or that capability, this user interface, that model, that, whatever, all of these things are quite fungible and are expiring quickly as the technology rapidly moves forward. But the piece that will not expire is the data. The data is the permanent key aspect that -- as we've said in our -- even in our core marketing, it's the gold for our customers and their ability to deliver our next capability in their enterprises. There is no way to look at Q2 earnings without considering the words Amy Weaver, President, and CFO, spoke during the last Morgan Stanley Technology, Media & Telecom Conference: in less than 24 months, the company has a "newfound discipline, a newfound maturity". Analysts are currently expecting Q2 2025 EPS of $2.36 (11.13% YoY growth), which is in the high range of what Salesforce guided for. This is because Salesforce has been able to overdeliver every quarterly EPS estimate for the past four years. This puts us in a tough spot: if Salesforce doesn't beat its guidance, investors will be nervous and the stock may fall once again. Nonetheless, FY 2025 EPS is expected to grow over 20% YoY, giving us a fwd PE of 26.7. After that, growth expectations moderated to low double-digit growth. Since I find it hard for Salesforce to decelerate its EPS growth from 20% to 11% in just one year, I believe chances are the stock is trading at a discount to its FY2026 and FY2027 estimates. Currently, the fwd PE is 24 and 21 respectively, but if Salesforce's EPS grows a bit faster than 11% in 2026 and 14% in 2027, we are clearly before lower multiples. Given Salesforce's new buybacks, the share count may go down and expand the final EPS outcome. If the company, for example, pulls off a 15% EPS growth in 2026, its PE comes down to 23.2. I am not advocating the company is trading at an incredibly low fwd PE, but a 23 is not expensive considering the moat and the huge revenue backlog the company has. In terms of valuation, Salesforce trades at a GAAP PE above 47, but its non-GAAP PE is almost half as much (TTM: 29.5; FWD 26.7). Its EV/EBITDA has moved downward and its earnings yield is the cheapest ever, though still a 2.1%. These metrics show that Salesforce has indeed recovered from its bottom, but it still is lacking multiple expansion. I think this is because Salesforce faces the issue of credibility. Not every investor is willing to bet on a decade of disciplined management with a focus on profitability. If that were the case, given Salesforce's RPO, we would be before one of the safest havens in the market and the multiples would probably spike up. Moreover, investors keep being scared by big M&A. Once again, Salesforce has committed to accretive acquisitions only, but, of course, this will have to be proven true once the deals materialize. Most importantly, Salesforce will have to prioritize its cash and debt over equity. Salesforce has had a big issue with stock-based compensation diluting shareholders. In FY2024, SBC was 8% of revenues and the company guides for FY2025 to be below 8%. Just a year and a half ago, the company was double-digits. So, in this upcoming report, there are three things to look at: operating margin expansion, RPO growth, and SBC moderation. If these things move in the right direction, we have new confirming data of a newfound financial discipline that is bound to reward Salesforce's shareholders. Though the stock is still highly volatile, my rating remains a buy, perhaps a bit cautious, but in any case, convinced of the long-term bull case. In this light, a sudden drop would be welcomed as a buying opportunity.

Salesforce: Q2 Might Outperform On Lowered Expectations After Q1 (NYSE:CRM)

Salesforce shows stronger earnings than revenue growth and is fairly valued but is vulnerable to competition from big tech and agile startups, particularly in AI and pricing flexibility. I last covered Salesforce (NYSE:CRM) in June; I put out a Buy rating at the time after its 20% correction after its Q1 FY25 earnings. Since that analysis, the stock has gained over 10% in price, far surpassing the S&P 500's 5.2% change. Now, its Q2 earnings are approaching on August 28th, and I am bullish on CRM coming up to these results as its valuation is slightly more appealing this time around, and analysts have lower expectations. In Q2, we can expect strength from the company from Salesforce Einstein, accretion from its recent acquisitions, growth from its data management and cloud services, and further benefits from its cost restructuring. There is a likelihood of an earnings and revenue beat due to said lower expectations than in Q1 from analysts. For long-term investors, I think Salesforce is fairly valued, despite issues with its market saturation causing revenue growth slowdown and broader pressures from AI-led startups and big tech, which could disrupt Salesforce's pricing power. Investors will be watching CRM's Q2 results carefully because its Q1 results were below expectations, with an unusual revenue miss for the first time since 2006. The company missed its revenue estimate by $13.38M despite beating its actual normalized EPS estimate by $0.07. While Investor confidence was shaken following the Q1 results, there has been a gradual recovery in share price, and analysts have adjusted their expectations for Q2, with many lowering their EPS and revenue forecasts. As a result, we could see an earnings and revenue beat in Q2 based on these lower expectations. This is a big week for technology earnings, with other major companies like Nvidia (NVDA), Dell (DELL), and CrowdStrike (CRWD) also releasing their results. The consensus for Q2 is that CRM will deliver 11.13% YoY growth in normalized EPS, with an estimate of $2.36. Furthermore, its revenue estimate is a strong $9.23B, reflecting a 7.3% YoY increase. Management has been focusing on its AI innovations and new product offerings, such as Salesforce Einstein, to drive growth. Through these innovations, the company is becoming more resilient against increasing competition and elongated sales cycles by becoming more attractive to current and prospective customers. Furthermore, CRM's various cloud services are expected to show continued growth. Recent acquisitions, such as Spiff and Airkit.ai, are also expected to have been accretive to the company and contributed to its revenue in the quarter. Also, as the company processes over 250 trillion transactions across Data Cloud per week, management will likely highlight the importance of its data management capabilities for its relevance in cloud and AI operations moving forward. The company has also been undergoing cost restructuring, including workforce reductions, to improve profitability. In Q1, this contributed to a 450 basis points expansion in its non-GAAP operating margin, and this focus and expansion is likely to have continued throughout Q2. Despite the valuation multiple drop that happened after Q1, Salesforce is now only 3% cheaper on its three core valuation multiples than before its Q1 results were reported. Therefore, one cannot exactly call this a value opportunity anymore. Instead, I think the stock is likely currently fairly valued as the market has driven up the price considerably following the post-Q1 correction. Furthermore, compared to other leading direct competitors, Salesforce has the cheapest valuation based on their PS ratios: Additionally, it has the second-highest percentage growth over 10 years in its TTM revenue. These two factors combined, the lowest PS ratio compared to dominant peers and the second-highest 10-year TTM revenue growth, are certainly a reason to be bullish on CRM right now, in my opinion. That being said, over recent years, Salesforce's growth rates have diminished. Its YoY revenue growth as a 5-year average is 21.9%, but just 11.04% YoY right now. Therefore, Salesforce definitely deserves its TTM PS ratio contraction from 8 as a 5-year average to 7.18 today, especially as Wall Street analysts expect it to deliver annual revenue growth of below 10% moving forward, at least until the fiscal period ending January 2028 is complete. With that taken into consideration, one might rightfully question whether Salesforce's valuation is sustainable over the long term. However, where Salesforce has slowed in revenue growth, it has improved in earnings growth. It has forward diluted EPS growth as a 5-year average of just 16.5%, but it's 28.1% right now. Additionally, its PE non-GAAP ratio has contracted from 44.67 as a 5-year average to 29.46 today; this is a reason to be bullish. In summary, broadly, I think Salesforce is roughly fairly valued. It is certainly showing signs of market saturation, but its strategy on internal efficiency and margin expansion is working, and I believe this is going to be further reinforced by AI capabilities in the long term. However, I consider its market position to be somewhat vulnerable right now with the rise of small-scale AI companies that could begin to offer services at a lower cost to consumers than Salesforce's fully-fledged software suite. As a result, investors should realise the stock is both not undervalued and carries medium-term to long-term operational risk as a result of new AI capabilities in the startup market. Salesforce's platform is known for its robust capabilities, but this also comes with the need for extensive user training, which can be a barrier to adoption, especially for smaller businesses with limited resources. Its business model also involves per-user fees, which can become costly and, again, likely deters SMEs. Furthermore, the total cost of ownership for businesses using Salesforce extends to customization, integration, and ongoing maintenance. Therefore, it is no surprise that competitors like HubSpot (HUBS), Zoho, and Zendesk are positioning themselves as simpler, more agile alternatives to Salesforce. These platforms emphasize ease of use, faster implementation, and lower costs, which is certainly more attractive to SMEs seeking quick implementation and minimal maintenance costs. However, Salesforce is exploring hybrid pricing models to combine per-user and consumption-based pricing, such as the UE+ product. Furthermore, management is focusing on delivering simplicity through its unified platform, Customer 360, driving integrated customer success across multiple business functions. Furthermore, I believe that Salesforce is one of the least powerful large tech companies operating in AI. Firms like Microsoft (MSFT), Alphabet (GOOG) (GOOGL), and other big tech firms are much more likely to develop AGI. Salesforce is unlikely to ever do so with its current trajectory. Therefore, I think big tech firms could develop new data management and customer relationship managers that outcompete Salesforce over time as a result of power in automated, intelligent technology capabilities. This long-term risk is likely more pronounced than the risk from startup AI firms that target SMEs to undercut Salesforce in price. Salesforce is not currently a value play, but it is a worthwhile investment at the current valuation. Q2 has lower expectations after a disappointing Q1, and I believe the company could outperform the consensus estimates for both top and bottom lines, although its top line is what continues to be at risk due to its market saturation and revenue growth slowdown. Pre-Q2 might be a wise time to buy CRM if looking for a long-term holding because if the company has outperformed this quarter, then the stock is likely to become moderately overvalued, providing a less attractive valuation than at the time of this publication.