Is Salesforce Stock a Buy Now?

Salesforce's (CRM 0.27%) stock price plunged 20% on May 30 after the company released its latest earnings report, marking its steepest one-day decline in 20 years. For the first quarter of fiscal 2025, which ended on April 30, the cloud software giant's revenue rose 11% year over year to $9.13 billion but missed analysts' estimates by $40 million. That marked its first top-line miss since 2006. Its adjusted EPS increased 44% to $2.44 and cleared the consensus forecast by $0.07.

Salesforce followed up that mixed report with soft guidance for the second quarter and the rest of the year. Let's see why this tech giant's growth is cooling off, and if its post-earnings plunge represents a buying opportunity for patient investors.

Image source: Getty Images.

What happened to Salesforce?

Salesforce is the world's leading provider of cloud-based customer relationship management (CRM) services, which help large companies easily store, organize, and analyze their customer data and sales trends. It also locks in its customers with additional cloud-based e-commerce, marketing, analytics, data visualization, and enterprise collaboration services. It's repeatedly expanded that ecosystem by acquiring companies like Demandware, Mulesoft, Tableau, and Slack.

From fiscal 2014 to fiscal 2024 (which ended this January), Salesforce's revenue grew at an impressive compound annual growth rate (CAGR) of 24%. It also turned profitable on a generally accepted accounting principles (GAAP) basis in fiscal 2017, and its GAAP net income increased at a CAGR of 44% from fiscal 2017 to fiscal 2024.

Salesforce splits its cloud ecosystem into five main segments: sales, service, platform and other, marketing and commerce, and integration and analytics. But over the past two years, four of those five segments experienced decelerating growth.

Data source: Salesforce. Constant currency terms. FY = Fiscal year.

Salesforce management blamed its slowdown on the macro headwinds, which forced many companies to rein in their cloud spending. However, its deceleration also coincided with the rise of generative AI platforms like OpenAI's ChatGPT, so some companies might be prioritizing AI investments over CRM spending in this challenging environment. Salesforce has been rolling out its own generative AI tools for analyzing customer data and automating tasks across its ecosystems, but none of those services seem to be attracting new customers or generating meaningful revenue yet.

Salesforce's Sales Cloud is also growing slower than Microsoft's smaller but comparable Dynamics 365 platform, which generated 22% year-over-year revenue growth on a constant currency basis in its latest quarter. It also faces fierce competition from smaller niche CRM players like HubSpot, which Alphabet's Google has reportedly been eyeing as a potential takeover target.

Salesforce's messy outlook suggests those macro and competitive challenges will drag on throughout the rest of the year. It expects its revenue to only rise 7%-8% year over year in the second quarter -- marking its slowest quarterly sales growth since its IPO more than two decades ago -- and increase just 8%-9% for the full year.

It's still focused on growing its margins and profits

As Salesforce's revenue growth slows down, it continues to cut costs to boost its operating margins and EPS. It reiterated its full-year adjusted operating margin outlook of 32.5%, which would represent a 200 basis point increase from fiscal 2024.

Analysts expect its adjusted EPS to rise 19% in fiscal 2025, which is a decent growth rate for a stock that trades at 22 times forward earnings. It also repurchased $2.2 billion in shares during the first quarter, and it plans to plow more of its free cash flow (FCF) into big buybacks throughout the rest of the year. It also initiated its first dividend earlier this year, but its paltry forward yield of 0.7% probably won't dazzle any income investors or set a firm floor under its tumbling stock price.

Is it the right time to buy Salesforce?

Salesforce's high-growth days are over, and it's becoming a mature tech company that is more focused on its earnings growth, buybacks, and dividends. However, it could struggle to spin all those plates as its revenue growth slows down.

If Salesforce cuts costs too aggressively right now, it could fall behind Microsoft, Google, and other tech giants in the AI race. But if it doesn't tighten its spending, its earnings growth could stall out and bring its activist investors back to the table.

Bearing these challenges in mind, I don't think it's the right time to buy Salesforce. Its stock deserved to drop after its messy earnings report, and it doesn't deserve to recover until it proves its problems are merely cyclical instead of existential.