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Salesforce (NYSE:CRM) shares fell slightly in premarket trading on Friday as Wolfe Research downgraded the cloud computing giant, citing slowing growth, issues with the company’s execution and acquisition missteps.
Analyst Alex Zukin lowered his rating on Salesforce (CRM) to peer perform from outperform and removed the price target, noting that for more than a decade, the company was the “pre-eminent SaaS growth stock and the model for the entire sector,” but as the company has changed its focus from top-line growth to free cash flow growth, it has also seen a material slowdown in growth, both in terms of revenue, bookings and free cash flow.
“While the macro is impacting nearly every company under coverage, we see [Salesforce] being particularly impacted as Covid pull-forward, execution missteps & M&A misfires have created meaningful idiosyncratic headwinds,” Zukin wrote in a note to clients.
Zukin added that Salesforce (CRM) is likely going to have to make “very significant incremental cuts” to get its margins needed to be to what investors would expect from a company generating “high single or low-double digit growth.”
Zukin noted that other software companies with significant size, such as Microsoft (MSFT), Oracle (ORCL) and Adobe (ADBE), have operating margins of 40% or more and GAAP earnings, while Workday (WDAY) and ServiceNow (NOW) are still expected to grow revenue at 20% next year. Salesforce (CRM) has neither of those characteristics, Zukin explained.
“Further, we believe that the current growth challenges present elevated risk of large scale dilutive M&A, and continued management turnover likely results in more talent shakeups putting even our (street low) numbers at potential risk,” the analyst added.
On Wednesday, Salesforce (CRM) said co-Chief Executive Bret Taylor would leave the company at the end of January.
Analysts are universally bullish on Salesforce (CRM). It has a BUY rating from Seeking Alpha authors, while Wall Street analysts rate it a BUY. Separately, Seeking Alpha’s quant system, which consistently beats the market, also rates CRM a BUY.
