Salesforce’s (NYSE: CRM) Q3 results and guidance weren’t spectacular compared to the analysts' forecasts, but beauty depends on perspective; it is in the eye of the beholder. Despite delivering mixed results, Salesforce proved its leadership position in CRM remains intact and can sustain long-term profitable growth. Critical details include nearly 10% growth in the core business driven by the 4th industrial revolution.
The fourth industrial revolution is centered on technology and accelerated by AI. Salesforce has included machine learning and AI capability into its platform since its beginnings. It is now a leader in business automation, providing tools businesses use to improve efficiency, unlock sales, improve cash flow, and reduce costs.
Agentforce, the suite of AI automation tools embedded in the platform, is central to its success in Q3 and is only one reason why the rally in this stock is just starting.
Capital Returns Fuel a Strong Technical Rally in CRM Stock
The technical outlook is another reason CRM stock will continue to rally in 2025. The CRM market completed a major consolidation over the last two years and rallied strongly to new highs this year. The break to near highs is significant because it brings technical targets into play based on the rally's magnitude and trading range leading up to it.
The base case scenario is for a $100 upswing from the critical resistance point and the potential for a $200 advance over the next two years. That puts the market in the $400 to $500 range, which could continue trending higher and move above $500 because of the company’s financial health and capital returns.
Salesforce delivered mixed results in Q3 2024, but mixed results were relative to a high expectation with robust cash flow in the picture. The company widened its GAAP and adjusted operating margins, grew cash flow at an accelerated pace, improved free cash flow by 30% to $1.78 billion or nearly 19% of revenue, and produced a positive cash flow quarter despite business investment and a robust capital return. The capital return includes share buybacks and dividends that amount to a 2% combined annualized yield.
The share repurchases reduced the share count by 1.6% for the quarter and just over 1% for the year.
The balance sheet highlights include a reduced cash position and decreased receivables offset by reduced liability and steady equity. Liabilities contracted more than assets, which would have increased equity if not for the repurchases. Treasury stock is up by 65% year over year, about $7.7 billion, to $19.4 billion, and is expected to grow over the coming year.
The Analysts Lead CRM Stock to New Highs in 2025
The analysts’ response to Salesforce’s results and guidance is superb. The more than a dozen revisions tracked by MarketBeat are positive, including increased price targets. The range of new targets runs from $375 to $450. It includes a new high target with a mean and median above $400, well above the pre-release consensus. The range of targets aligns with the technical base case and could be reached by the end of 2024 or early 2025.
Institutional activity will help drive this market higher. The balance of activity in 2024 is strongly bullish, with buyers outpacing sellers by 2:1, and activity is strong in Q4.
Ownership is broad, with public, private, and fund investors represented. Activity in Q4 includes several noteworthy position increases among private money managers. Together, the institutions own more than 80% of the stock and are a significant force in the market.
The primary risk is the valuation. The stock is trading above 35X this year’s and 30X next year’s earnings, which is on the high side for blue-chip tech. However, the company is growing consistently and profitably, has a favorable outlook and provides robust cash flow.
The stock deserves and can sustain a premium in this scenario because the longer-term outlook continues to undervalue it. The forecast is for EPS to double over the next eight years, putting the forward price multiple under 17X and in value territory.
