Salesforce Inc. has recently shifted its focus towards prioritizing profits and margins, a departure from its past strategy of pursuing flashy deals to drive growth.
This change has not gone unnoticed by Wall Street, as evidenced by the significant rise in Salesforce shares (CRM, +1.07%), which surged nearly 100% in 2023. As a result, Salesforce emerged as the top performer in the Dow Jones Industrial Average for that year.
Analyst Predicts Further Gains
According to Baird analyst Rob Oliver, Salesforce’s stock may have more room for growth. In a recent upgrade, Oliver raised his rating on Salesforce shares from neutral to outperform. He also raised his price target on the stock from $240 to $300, indicating a potential 14% upside from current levels.
In a note to clients, Oliver expressed his surprise at the company’s commitment to delivering margins, which played a significant role in its strong performance last year. He also highlighted Salesforce’s attractive valuation, with the stock trading at historically low levels of around 25 times forward estimates for free cash flow. Furthermore, despite modest revenue growth expectations, Oliver believes that the company has the potential to exceed investor expectations positively.
Factors Driving Potential Growth
Oliver identified several factors that could contribute to Salesforce’s future upside. These include potential price increases, the potential return of front office spend, and improved sales execution. By capitalizing on these opportunities, Salesforce can drive increased profitability and better financial performance.
Software Industry Trends
Salesforce’s focus on improving its free-cash-flow margin aligns with a broader trend seen in the software industry. Oliver’s analysis of more than 20 companies in this sector suggests that the average free-cash-flow margin for calendar year 2024 could reach 18%. This marks a considerable increase from the 8% observed in calendar year 2019.
Market Reaction
As of Thursday’s premarket trading, Salesforce shares were up 1.6%, reflecting investor optimism following the analyst’s upgrade.
