- Salesforce may have growth problems on the horizon, according to Wall Street analysts from Morgan Stanley and UBS.
- Morgan Stanley analysts cited slower billings growth this fiscal year and lower margins due to Salesforce's recent massive acquisitions.
- UBS analysts, meanwhile, wrote in a note that Salesforce was suffering from a "lack of innovation" that could hinder its growth.
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Salesforce may have growth problems on the horizon, according to Wall Street analysts from Morgan Stanley and UBS. Both firms cast a critical eye on the customer relationship management giant in notes to clients earlier this week.
Salesforce's subscription model means that it doesn't always feel the effects of slowing business right away, but Morgan Stanley analyst Keith Weiss pointed out there are signs it could be ahead: The company showed slowing billings growth — meaning the amount of money it is set to collect from customers — in 2020.
"Billings are a leading indicator for revenues," Weiss wrote in a note to clients, adding that the billings growth decline will likely lead to "decelerating revenue growth" next fiscal year. With annual billings growth shrinking to 17% this year from 29% in 2019, he forecasts that revenue growth will slow from 29% in the first half of this year to 18% growth next year.
Morgan Stanley analysts also note that Salesforce's biggest growth drivers in the last few years have come via acquisitions like MuleSoft and Tableau. The size of those deals — a whopping $22.2 billion in total — has led to lower margins for Salesforce overall.
"Given the current scale of Salesforce and a growth strategy heavily incorporating M&A, we believe a sharper focus on [earnings per share] growth will likely be needed to drive shares materially higher from here," Weiss wrote, downgrading the stock from an "over-weight" rating, meaning that its price is expected to rise, to an "equal-weight" rating, meaning the price is likely to stay the same. He kept the price target of $275 (Salesforce is currently trading at $248 per share as of Friday afternoon).
Alongside Morgan Stanley, UBS also predicted potentially slower growth for Salesforce going forward. UBS analysts wrote in a note earlier this week that Salesforce was suffering from a "lack of innovation" that could hinder its growth.
"Among Salesforce's major product segments, they're most vulnerable in the Marketing Cloud, where emerging firms such as Twilio (more so with its acquisition of CDP vendor Segment) are positioned to chip away at Salesforce's business," UBS analysts wrote.
Interestingly, Morgan Stanley analysts see its Marketing Cloud as being one of Salesforce's highest growth opportunities, along with its Commerce Cloud.
It's been a strange year for all companies, including Salesforce, because of the unexpected impacts of the pandemic. After initially cutting its full year guidance in May from $21 billion down to $20 billion, Salesforce beat analyst estimates in Q2 and raised its annual revenue guidance slightly, forecasting between $20.7 to $20.8 billion for the year.
However, right after reporting those blockbuster results in August, it laid off about 1,000 employees — or roughly 2% of its workforce — as part of a plan to reallocate resources amid the economic downturn.
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