Why You Should Avoid Overvalued and Overhyped CRM Stock (For Now)
It may be tempting to invest in customer relationship management (CRM) software specialist Salesforce (NYSE:CRM) right now. Yet, caution is advised, as CRM stock isn’t a bargain at all. It will be difficult for Salesforce to live up to the company’s expectations, especially now that Salesforce is aggressively slimming down.
At first glance, it seems like Salesforce is infallible and unstoppable. The company is among the newest additions to the Dow Jones Industrial Average. Also, Salesforce is embedding generative artificial intelligence (AI) into the company’s cloud products (though some people might argue that Salesforce is a latecomer and bandwagon-jumper in this regard).
Yet, any stock can be vulnerable to pullbacks, especially after a huge run-up. Before investing in Salesforce, consider the risk-versus-reward profile, as a substantially smaller company might not be able to live up to its own high expectations.
Salesforce’s Chief Executive Acknowledges a Mistake
If anything has shifted the hype surrounding Salesforce into overdrive, it’s the company’s revenue guidance for fiscal 2024. Salesforce expects to generate $34.5 billion to $34.7 billion, up approximately 10% year over year and higher than Wall Street’s consensus estimate of $34 billion.
CRM stock jumped from $165 to nearly $190 after the earnings and guidance release. Now, Salesforce has the daunting task of justifying the hype and meeting its own revenue expectations. That’s going to be challenging during a time when some businesses are cutting costs due to elevated inflation and recession fears.
Salesforce is also cutting its costs. CEO Marc Benioff admitted that Salesforce “hired too many people” after the onset of the Covid-19 pandemic when technology companies were making money hand over fist.
Alarmingly, Salesforce’s workforce increased 62% during that hype-fueled time. Now, in 2023, the company is laying off 10% of its staff. It certainly won’t be easy for a significantly smaller Salesforce to live up to its pumped-up revenue expectations.
Several Metrics Indicate CRM Stock Isn’t a Good Value
Another concern is the valuation of CRM stock. The aforementioned post-earnings share-price rally made the stock even more expensive than it already was.
We can drive the point home by applying some old-school but still-relevant valuation metrics. For example, Salesforce’s trailing 12-month (TTM) GAAP price-to-earnings (P/E) ratio of 906.44x is absolutely outrageous. Bear in mind the median P/E ratio for the sector is 21.95x.
Meanwhile, Salesforce’s TTM price-to-sales (P/S) ratio of 6.01x is more than double the sector median P/S ratio of 2.68x. In addition, Salesforce’s TTM price-to-cash-flow (P/CF) ratio is 26.73x, versus the sector median P/CF ratio of 19.79x.
It’s Wise to Avoid CRM Stock Now
Given the company’s sky-high P/E ratio, it’s sensible to wait for the Salesforce share price to move closer to its 52-week low of $126.34 before taking a position. Otherwise, you might end up on the wrong side of the trade.
Besides, Salesforce has to knock it out of the park with stellar revenue stats over the coming year. This will be difficult to achieve with a reduced staff. So, now isn’t the right time to buy CRM stock, as lower prices are likely on the horizon.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
