What happened:
Shares of customer relationship management software maker Salesforce (NYSE:CRM) rose 5.9% in afternoon trading as markets recovered following an initially muted response to the Federal Reserve’s rate cut, which sparked renewed appetite for risk assets. While investors had expected a rate cut from the US central bank, there was some back-and-forth over whether the cut would be 25 basis points (a quarter of a percentage point) or 50 basis points (half a percentage point).
The Fed ended up cutting its policy rate by 50 basis points (0.5%) to 4.75%-5.00%. This is the first rate cut in about four years. As a reminder, the Fed under Chairman Jerome Powell began raising rates to address inflation stemming from the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to surge.
Looking ahead, the Fed signaled that further cuts are possible in 2024/25. Taken together, the announcement and outlook provided a breath of fresh air and a clearer view of the Fed's monetary policy stance, which the market has been waiting for with bated breath. If there's one thing the market doesn't like, it's uncertainty.
It is worth remembering that the value of a stock depends on the sum of its future cash flows discounted to today. The result of lower interest rates, all else being equal, is a higher stock valuation. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows that occur many years from now.
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What does the market tell us?
Salesforce stock is quite volatile, having moved more than 5% over the past year. Against this backdrop, today's move indicates that the market views this news as significant, but not something that fundamentally changes its perception of the business.
The biggest move we wrote about over the past year was 4 months ago, when shares fell 20.2% following news that the company reported first-quarter earnings results with key metrics, including revenue and top line, falling below expectations.
The company experienced reduced bookings in the quarter due to longer deal cycles, deal compression and high levels of budget scrutiny. It noted that pressure in the professional services business remains ongoing and it also saw some volatility in the licensing segment.
On the revenue side, management expects the measured purchasing behavior seen in the first quarter to continue throughout the fiscal year, indicating a challenging sales environment. As a result, it gave a revenue forecast for the next quarter, which fell short of analysts' expectations. The full-year subscription revenue forecast was also lowered. While the company maintained its revenue forecast for the full fiscal year, the expected growth rate of 8% to 9% is relatively modest compared to previous years.
Finally, the company expects stock-based compensation to be just over 8% of revenue, a modest increase from prior guidance. Overall, this was a poor quarter for Salesforce, as investors are likely to temper their optimism following the weak performance and guidance.
Salesforce is up 3.8% since the beginning of the year, but at $266.12 per share it is still trading 16% below its 52-week high of $316.88 set in February 2024. Investors who bought $1,000 worth of Salesforce stock 5 years ago would now be looking at an investment worth $1,733.
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