Opinion: Salesforce’s big growth era seems over, which may prompt return to its old ways

That is a far cry from the past five years, in which Salesforce has seen revenue growth at rates ranging from 24.9% in fiscal 2018 to 28.7% in 2020, before slowing to 18.5% in fiscal 2023. With 11% projected for fiscal 2024, its growth is more like a mature software company than one in the hot cloud sector, where much younger, hypergrowth cloud companies like Snowflake
SNOW,
+7.05%,
which just reported third-quarter revenue growth of 32%, are thriving.

“The low double-digit growth we are seeing now and likely in the future is significantly down from what most investors expected even a year ago,” said Bernstein Research analyst Mark Moerdler, in a note to clients. “Salesforce is no longer a growth software company by virtually anyone’s metrics and needs to be compared to other mature software companies on all the major metrics, including valuations,” he added.

Salesforce has seriously refocused on profits after its brush with activist investors over the past year. Its adjusted operating margins rose to 32.1% in the latest quarter, up from 22.7% a year ago, reflecting recent moves by the company to eliminate jobs and otherwise cut costs. But as Salesforce makes profit progress, its top-line trends are sluggish.

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The company faces potential revenue-growth challenges moving forward as well. Chief Operating Officer Brian Millham said on Wednesday’s earnings call that macroeconomic headwinds were weighing on areas of the business including professional services and the Slack enterprise-messaging platform.

For maturing companies, a typical tactic to achieve growth is to buy it.

Early in its history, Salesforce made many small acquisitions, but began stepping up to bigger deals in recent years, such as its nearly $28 billion purchase of Slack Technologies, the messaging platform, in 2021. It also purchased Mulesoft in 2018, which analysts at Macquarie Research estimated grew 26% in the past quarter.

While those deals have brought more revenue and growth, they also brought disruption and management turmoil, with some of the CEOs of those companies departing in high-profile exits, such as the departure of Stewart Butterfield, the co-founder of Slack, late last year.

Pat Walravens of JMP Securities wrote in a note that “some investors worry that growth may fall into the single digits, or that Salesforce may return to a more active M&A program.” But he believes the company is still an attractive stock, and raised his price target, in part due to its opportunities in AI including its Einstein Copilot, Mulesoft and the potential for a return of big deals.

For Salesforce, one opportunity for growth is in AI. Like numerous other software companies, its executives have talked up AI, but Wall Street hasn’t seen a direct, meaningful revenue impact from the technology just yet. By contrast, several hardware or chip companies selling into AI data centers are now breaking out revenue coming from AI.

Nonetheless, Chief Executive Marc Benioff told analysts that Salesforce has been “completely rebuilt” as it approaches its 25th birthday, as it’s now “well-positioned for the AI revolution.”

But 25 is about middle age for a tech company. And Bernstein’s Moerdler noted its multiples suggest it is a mature software company. “Salesforce is growing incrementally slower than Microsoft Corp.
MSFT,
+0.02%,
has much lower growth prospects for the future, and has GAAP margins that are about 1/2 of Microsoft’s — yet the companies’ multiples on an EPS basis are surprisingly close,” he wrote.

Investors should not be entirely surprised going forward if Salesforce decides to embark on more acquisitions, especially with AI all the buzz right now.