What Happened?
Shares of customer relationship management software maker Salesforce (NYSE: CRM) fell 6.4% in the afternoon session after the company reported underwhelming first-quarter 2025 results (fiscal 2026), with high expectations heading into the quarter, suggesting markets wanted a more resounding beat, as sales, earnings, and operating profits all came in mostly in line the Wall Street's estimates.
On a more positive note, Salesforce beat analysts' billings expectations by a more convincing margin, and its full-year EPS guidance was raised and slightly exceeded Wall Street's estimates. Some Wall Street analysts weren't impressed at all with the results, raising concerns, including weak RPO growth, acquisition-related issues, and macro uncertainty. For example, RBC Capital analyst Rishi Jaluria downgraded the stock to Sector Perform from Outperform and reduced their price target on the stock to $275 from $420. The analysts added "Stepping back, while we like the margin expansion story at Salesforce and the valuation is undemanding, deal risk with Informatica has tipped the scales for us."
Lastly, some investors may be skeptical of Salesforce's $8 billion acquisition of Informatica. The company's historical large acquisitions (Tableau, Slack) were met with some uneven results and skepticism over strategic rationale. Because of that, Salesforce has been focused on organic growth and margin expansion in the last few years. This latest deal could be a change of tone, and some are not happy about that prospect.
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What The Market Is Telling Us
Salesforce’s shares are not very volatile and have only had 9 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.
The biggest move we wrote about over the last year was 12 months ago when the stock dropped 20.2% on the news that the company reported first quarter earnings results with key top line metrics including revenue and billings falling below expectations. The company experienced softer bookings in the quarter due to elongated deal cycles, deal compression, and high levels of budget scrutiny. It called out continuing pressure in the professional services business and also observed some volatility in the Licensing segment.
Looking ahead, management expects the measured buying behavior observed in Q1 to continue throughout the fiscal year, which points to a challenging sales environment. As a result, it gave revenue guidance for the next quarter, which missed analysts' expectations. Full year subscription revenue guidance was also lowered. While the company maintained its revenue guidance for the full fiscal year, the expected growth rate of 8% to 9% is relatively modest compared to previous years.
Lastly, the company expected stock-based compensation to be slightly above 8% of revenue, a modest increase from prior guidance. Overall, this was a bad quarter for Salesforce, as investors are likely to tame their optimism following the weak performance and guidance.
Salesforce is down 21.3% since the beginning of the year, and at $260.23 per share, it is trading 29.3% below its 52-week high of $367.87 from December 2024. Investors who bought $1,000 worth of Salesforce’s shares 5 years ago would now be looking at an investment worth $1,489.
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