Shares of tech giant Salesforce (CRM 1.68%) were on a roll in the early months of 2024, reaching a 52-week high of $318.72 in March. The company also rewarded investors by initiating a dividend for the first time in its history.
However, after announcing results for its fiscal first quarter, which ended April 30, Salesforce's share price plunged. The stock has recovered a bit since then yet remains well below its 52-week high.
Could this be an opportunity to pick up shares? Or is the price drop an indication to stay away? To answer these questions and determine Salesforce's long-term investment potential, here's a look into the company's recent performance.
A look at Salesforce's fiscal Q1
What caused Salesforce stock to drop after earnings were released? The company's revenue in Q1 and guidance for Q2 failed to meet Wall Street's expectations.
According to Salesforce management, customers are more cautious about spending, causing sales cycles to take longer. This is a trend Salesforce has seen over the past two years. Management believes the current environment is the result of a post-pandemic adjustment period among clients.
Despite Wall Street's reaction to the Q1 earnings report, Salesforce's overall performance for the quarter was quite good. Q1 revenue increased 11% year over year, reaching $9.13 billion. This result was within the company's Q1 guidance range of $9.12 billion to $9.17 billion.
Moreover, Salesforce's Q1 diluted earnings per share (EPS) was $1.56, a 680% increase from last year's EPS of $0.20. Its excellent EPS growth was thanks to the company's cost management. While Q1 revenue increased 11%, Salesforce managed to keep the cost of goods sold to a modest 2% increase over the prior year.
Looking at Salesforce's Q2 guidance, the company estimates revenue will reach at least $9.2 billion. This is a solid increase from the prior year's $8.6 billion.
Salesforce's advantages in the AI age
While the company anticipates continued softness in customer demand this year, Salesforce expects to see a revenue tailwind from artificial intelligence (AI). As part of capturing this AI opportunity, the firm invested in cloud computing capabilities, such as its Data Cloud platform.
Data Cloud enables customers to consolidate all their business data into a single repository within Salesforce's system, and the product is taking off.
Q1 represented the second consecutive quarter where over 1,000 customers adopted Data Cloud. Thanks to the success of its cloud offerings, Salesforce is now among the top five cloud computing companies in the world.
Data Cloud is important in the era of AI. It allows Salesforce's AI platform, dubbed Einstein, quick and convenient access to the data needed to execute tasks successfully.
Along with these technologies, Salesforce's leadership in the customer relationship management (CRM) space provides a significant competitive advantage. This leadership position enabled Salesforce to accumulate a massive amount of customer data -- 250 petabytes of it, in fact. That's over 10 times larger than the Library of Congress.
The key ingredient necessary for AI systems to function is lots of data. This means Salesforce's enormous data trove, housed in its Data Cloud, enables Einstein to deliver robust AI capabilities to customers.
Deciding on Salesforce stock
Salesforce CEO Marc Benioff said the company is focused on two areas, its financials and AI, stating, "I don't think any company is more well positioned for the future of artificial intelligence."
He may well be right, considering the elements Salesforce holds for AI success. As for its financials, along with year-over-year revenue and EPS growth, the company exited Q1 with strong free cash flow (FCF). Q1 FCF was $6.1 billion, a 43% increase from the previous year.
In addition, its Q1 balance sheet was stellar. Salesforce's total assets were $96.2 billion, with $17.7 billion of that in cash, cash equivalents, and marketable securities. Total Q1 liabilities were $36.5 billion.
The company's revenue growth, strong financial health, and its AI opportunities make Salesforce a compelling long-term investment. No wonder Salesforce is a popular tech stock among billionaire-led hedge funds.
And among Wall Street analysts, the consensus is an overweight rating with a median share price of $300 for Salesforce stock, indicating a belief in some upside. With the stock's current dip from its 52-week high, now is a good time to buy shares of Salesforce.
