What happened:
Shares of customer relationship management software maker Salesforce (NYSE:CRM) rose 5.9% in the afternoon session as markets rebounded from an initially muted reaction to the Fed’s rate cut, which fueled renewed appetite for risky assets. While investors were expecting a rate cut from the U.S. central bank, there was some back-and-forth over whether the cut would be 25 bps (a quarter of a percent) or 50 bps (half a percent).
The Fed ultimately cut its policy rate by 50 bps (0.5%) to 4.75%-5.00%, the first rate cut in about four years. As a reminder, the Fed, under Chairman Jerome Powell, began raising rates to address inflation stemming from the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending sent inflation soaring.
Looking ahead, the Fed indicated that more austerity is possible in 2024/25. All in all, the announcement and outlook provided a breath of fresh air and a clearer picture of the Fed’s monetary policy that the market has been waiting for with bated breath. If there’s one thing the market doesn’t like, it’s uncertainty.
As a reminder, the driving force behind a stock’s value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all other things being equal, is higher stock valuations. This is especially true for higher growth stocks, such as those in the technology sector, where today’s value is more dependent on cash flows many years in the future.
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What the market tells us:
Salesforce shares are quite volatile and have seen 5 moves of more than 5% in the past year. In that context, today’s move indicates that the market sees this news as meaningful, but not something that would fundamentally change perceptions of the company.
The biggest change we’ve written about in the past year happened four months ago, when the stock fell 20.2% after the company reported first-quarter earnings. Key numbers like revenue and billings came in below expectations.
The company experienced softer bookings in the quarter due to extended deal cycles, deal compression and high levels of budget control. It cited continued pressure in professional services and also observed some volatility in the Licensing segment.
Furthermore, management expects the measured buying behavior observed in Q1 to continue throughout the fiscal year, indicating a challenging sales environment. As a result, it issued a revenue forecast for the next quarter that missed analysts’ expectations. The full-year revenue forecast was also lowered. While the company maintained its revenue forecast for the full fiscal year, the expected growth rate of 8% to 9% is relatively modest compared to previous years.
Finally, the company expects stock-based compensation to be just above 8% of revenue, a modest increase from its previous guidance. Overall, this was a poor quarter for Salesforce, as investors are likely to temper their optimism following the weak performance and guidance.
Salesforce has risen 3.8% since the beginning of the year, but at $266.12 per share, it still trades 16% below its 52-week high of $316.88, set in February 2024. Investors who purchased $1,000 worth of Salesforce shares five years ago would now be looking at an investment worth $1,733.
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