Salesforce stock (NYSE: CRM) has gained 74% YTD, as compared to the 19% rise in the S&P500 over the same period. Further, at its current price of $230 per share, it is trading 4% below its fair value of $240 – Trefis’ estimate for Salesforce’s valuation.

Amid the current financial backdrop, CRM stock has seen little change, moving slightly from levels of $225 in early January 2021 to around $230 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. Overall, the performance of CRM stock with respect to the index has been quite volatile. Returns for the stock were 14% in 2021, -48% in 2022, and 74% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 – indicating that CRM underperformed the S&P in 2021 and 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Information Technology sector including AAPL, MSFT, and NVDA, and even for the megacap stars GOOG, TSLA, and AMZN. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could CRM face a similar situation as it did in 2021 and 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

The company surpassed the consensus estimates in the third quarter of FY 2024 (FY Feb-Jan), with revenues increasing by 11% y-o-y to $8.72 billion. It was driven by a 13% growth in the subscription & support revenues, partially offset by a 4% drop in the professional services & other segment. The subscription & support unit contributes more than 90% of the top line and includes five sub-segments – sales cloud (up 10%), service cloud (11%), platform and other (11%), marketing & commerce (8%), and data (up 22%). On the cost front, total expenses as a % of revenues witnessed a favorable decrease in the quarter. Overall, the net income improved from $210 million to $1.22 billion.

The company’s top line grew 11% y-o-y to $25.6 billion in the first nine months of FY 2024. It was primarily because of a 12% rise in the subscription & support division. Further, the operating margin jumped from 2.9% to 13.3% over the same period, due to lower expense figures. This resulted in a net income of $2.7 billion, as compared to the figure of $306 million in the year-ago period.

Moving forward, the firm expects the revenues to remain between $9.18-$9.23 billion in Q4. Overall, Salesforce’s revenues are estimated to touch $34.76 billion in FY2024. Additionally, CRM’s revenue per share is likely to increase to $33.85. This coupled with a P/S multiple of just above 7x will lead to a valuation of $240.

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