Why Salesforce (CRM) Stock Is Rising Today

What happened:

Shares of customer relationship management software maker Salesforce ( NYSE:CRM ​​) rose 5.9% in the afternoon session as markets bounced back from an initially muted response to the Fed’s rate cut that sparked a renewed appetite for risk assets. While investors expected a rate cut from the US central bank, there was little discussion as to whether the cut would be 25 bps (a quarter of a percent) or 50 basis points (half a percent).

The Fed ended up cutting its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate cut in about four years. As a reminder, the Fed — under Chairman Jerome Powell — began raising rates to combat inflation resulting from the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages and stimulus spending caused inflation to soar. hot

Looking ahead, the Fed has signaled that more tapering is possible in 2024/25. Putting it all together, the announcement and outlook provided a breath of fresh air and a clearer picture of the Fed’s monetary policy direction, which the market has been waiting with bated breath. If there’s one thing the market doesn’t like, it’s uncertainty.

As a reminder, the determinant of a stock’s value is the sum of future cash flows discounted to the present. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher growth stocks, such as those in the technology sector, where present value is more dependent on cash flows many years into the future.

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What the market tells us:

Salesforce stock is quite volatile and has had 5 moves of more than 5% in the past year. Against that background, today’s move indicates that the market sees this news as significant, but not something that would fundamentally change its perception of the business.

The biggest move I wrote about in the past year was 4 months ago, when the stock fell 20.2% on news that the company reported first-quarter earnings results, with top-line key metrics including revenue and invoices below expectations.

The company saw weaker bookings in the quarter due to extended deal cycles, deal compression and high levels of budgetary control. He signaled continued pressure in the professional services business and also noted some volatility in the licensing segment.

Going forward, management expects the measured buying behavior seen in Q1 to continue throughout the fiscal year, indicating a challenging sales environment. As a result, it provided revenue guidance for the next quarter that missed analysts’ expectations. Full-year subscription revenue guidance was also cut. While the company maintained its revenue guidance for the full fiscal year, the estimated growth rate of 8% to 9% is relatively modest compared to prior years.

The story continues

Finally, the company expects stock-based compensation to be slightly above 8% of revenue, a modest increase from previous guidance. Overall, this was a bad quarter for Salesforce, as investors are likely to dampen their optimism following weak performance and guidance.

Salesforce is up 3.8% year-to-date, but at $266.12 a share, it still trades 16% below its 52-week high of $316.88 from February 2024. Investors who bought shares Salesforce worth $1,000 5 years ago would now be looking at an investment worth $1,733.

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