Shares of Salesforce (CRM 0.70%), a cloud-computing veteran, were pulling back last month after the company cut its guidance in its second-quarter earnings report. Broader macroeconomic pressure also seemed to weigh on the stock in the second half of the month, and shares finished down 15% according to data from S&P Global Market Intelligence.
As you can see from the chart below, Salesforce mostly tracked with the S&P 500 through the first half of the month but diverged on the earnings-driven sell-off on Aug. 25.
Despite its size and profitability, Salesforce is still susceptible to the same cyclical forces as smaller cloud stocks.
The stock held steady through the first half of the month even as a pair of analysts issued cautious or negative notes, but it began sliding on Aug. 15 as fears of rising interest rates and a recession began to creep back into the market.
Shares then fell 11% over a three-day span starting Aug. 25 after its earnings report came out. The results were mostly solid, with revenue increasing 22% to $7.72 billion, edging out estimates at $7.69 billion. Current remaining performance obligations, a measure of backlog to be fulfilled over the next year, increased 15% to $21.5 billion, possibly indicating a slowdown in revenue growth or lengthening sales cycles.
Salesforce hiked spending on sales and marketing and R&D faster than revenue growth, and adjusted earnings per share actually fell from $1.50 to $1.19, which still beat the consensus at $1.02.
Management also announced its first-ever share repurchase program with the board authorizing a $10 billion buyback. That’s potentially a sign that management believes the stock is cheap.
In its guidance, the company called for third-quarter revenue of $7.82 billion to $7.83 billion, representing 14% revenue growth, which was below estimates at $8.07 billion. Its adjusted EPS forecast of $1.20 to $1.21 was also below the Wall Street view at $1.29.
Co-CEO Bret Taylor referred to a “measured buying environment” in comments, showing the company is facing some of the same macro headwinds as its peers.
While the sell-off seems understandable in the face of disappointing guidance, Salesforce has been around for more than 20 years and has survived previous recessions. The company is also reliably profitable, and its customer relationship management suite continues to deliver growth.
Shares look very affordable after the sell-off, trading at a price-to-earnings ratio of just over 30. Considering its historical growth rate and performance, that looks like a great price.