Salesforce Soars on AI Hype, but Is the Valuation Justified?
2024.12.05 02:33
Salesforce (NYSE:) reported quarterly results of $2.41 in adjusted EPS (+14% growth), on sales of $9.44 billion (+8% growth).
EPS results missed street estimates by -1.2%, while sales results beat estimates by +1.0%.
The stock has gapped up about 8% today after the results. Presumably related to excitement in the company’s new AI program; Agentforce. Price briefly broke above 2022’s record high in March, before pulling back towards its 50% retracement level and 200-week moving average for support.
Over the last few months, its rallied back to, and eventually broke above, its previous record high. Price pulled back and retested the breakout point a couple of weeks back and held.
Right now the street is pricing in about 11.2% EPS growth and 8.5% sales growth over the next 12 months. At today’s price level, the stock trades at 33.6x price to earnings. This is about in line with the rest of the “magnificent 7” stocks valuation.
Love the company, but not excited about the stock. Here’s why; the market average EPS growth rate is about 11%, which is right in line with CRM. But the trades at about 23x earnings, while CRM trades at 34x. So your buying a stock with the same growth rate as the market, but paying a premium valuation of about 50% for average growth.
Yes, CRM deserves a premium valuation for its competitive advantages. It still doesn’t excite me here. One of two things could change my mind, 1) a significant increase in expected growth rate (which is a possibility) or 2) a pullback towards its 200-week moving average.
Nothing wrong with owning the stock. Chances are it will outperform the S&P 500 over time, even at these levels. I look for stocks that fit into either of two categories, 1) stocks with growth prospects well above the market average, or 2) stocks trading well below the average market valuation, with good prospects for the future. CRM just doesn’t fit into either of these categories at the moment, in my opinion.
