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Activist investor: Salesforce under pressure to raise margins as Starboard sets sights on CRM stock price gains

By Alejandro Arrieche

Edited by Georgy Istigechev

17:59, 26 October 2022

Salesforce cloud logo sign at company HQ in San Francisco
Salesforce (CRM) stock has lost close to 35% of its value year-to-date – Photo: Michael Vi / Shutterstock.com

Salesforce (CRM) saw a boost in its share price last week after news broke that Starboard Value, a multi-billion dollar hedge fund run by Jeffrey Smith, has been amassing a “significant stake” in the software company.

This Salesforce stock news resulted in a single-day 4.3% gain for CRM on 18 October, when CNBC first reported Starboard’s investment in the firm.

Gains have piled up since then, with the stock accumulating a 12.3% advance thus far.

Salesforce (CRM) Live Stock Price Chart

What is an activist investor and what plans may Starboard Value have for Salesforce?

In this article, we share further details about what this announcement could mean and how it could potentially affect investors.

What is Salesforce (CRM)?

Salesforce develops customer relationship management (CRM) software that helps corporations in organising and better manage their internal processes.

The company was founded in 1999 by a former Oracle (ORCL) executive – Marc Benioff – and has been growing non-stop since then. This year, the company ranked 137th in the Fortune 500 list of largest corporations in the United States.

During the 2022 fiscal year, Salesforce generated revenues of $26.5bn and net income of $1.44bn, according to the company’s filings with the US Securities and Exchange Commission (SEC).

The bulk of Salesforce’s revenues come from subscription fees paid by its customers for accessing the company’s cloud-based CRM platform. It also generates income from the collection of professional services fees for providing support to both existing and prospective customers.

The company is led by two individuals who have been appointed co-CEOs. One is the firm’s founder, Marc Benioff, and the other is Bret Taylor, who was promoted to this position in 2021 after serving two years as the firm’s Chief Operating Officer.

By the end of the 2022 fiscal year, the company employed over 73,000 people to run its operations. The business is headquartered in San Francisco, California. Salesforce went public in June 2004, when the stock was listed on the New York Stock Exchange (NYSE) at $11 a share.

CRM 10Y STOCK PERFORMANCE VS US STOCK MARKET INDICES

In the past 10 years, the Salesforce stock price has gone up by 344.3%.

During that same period, the value of the benchmark S&P 500 Index (US500) and the tech-heavy US Tech 100 Index (US100) increased by 173.1% and 337.6% respectively.

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What is an activist investor?

Activist investors are the stockholders of a company – either individuals or institutions – who amass a percentage of ownership that gives them enough voting interest or a certain number of seats on the Board of Directors to influence the company’s strategic decisions.

In most cases, activist investors have identified aspects of the business that can be improved or found untapped potential that could be unlocked.

By becoming prominent stockholders, they can pressure the firm’s leadership team to take action to, hopefully, increase the value of the company.

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The market typically has a positive view of activist investors, as long as the individual or investment fund has a robust track record of successful interventions at other businesses.  

Salesforce news: What does Starboard Value aim to achieve?

David Faber, a reporter for CNBC, confirmed on 18 October that Starboard Value was a Salesforce activist investor as the fund had accumulated a stake in Salesforce that would allow the firm to influence the trajectory of the software developer’s business.

The financial details of this investment were not revealed at the time, but Starboard confirmed its involvement with Salesforce during a conference called Capitalize for Kids.

Starboard verified its interest in Salesforce through a presentation it published on its official website that analysed several aspects of the business. First of all, Starboard recognised the outstanding track record of Salesforce in terms of sales growth.

In this regard, the firm highlighted that the software developer has grown its top line at a compounded annual growth rate of 38% in the past 20 years. 

Meanwhile, the investment fund emphasised the attractiveness of Salesforce’s current valuation as it believes that the market is not recognising the opportunity for significant margin expansion in the future along with further improvements in the company’s “business quality and growth outlook”.

One possible hint in regards to what kind of pressure Starboard will exert on the leadership team as a Salesforce activist investor can be evidenced in the comments concerning Salesforce’s profit margins. The hedge fund stated that the software developer has failed to improve its margins despite a slowdown in its revenue growth rates.

In this regard, companies that reach a more mature stage of their development tend to focus on improving profitability. Since Salesforce has not been able to improve this area of the business, the market is assigning a lower trading multiple to the stock, Starboard’s investment team reasoned.

The hedge fund’s presentation reads:

“We appreciate the Company’s commitment to a firm margin target, inclusive of potential M&A headwinds, and we continue to believe there is significant additional opportunity to expand margins beyond 25%.”

This is yet another indication that Starboard’s focus as an activist investor would be pushing the leadership team to improve the business’s profit margins as that could lead to an expansion in the valuation multiples assigned by the market to CRM and, ultimately, to an increase in the Salesforce stock value.

Salesforce activist investor news: Analyst commentary

The consensus recommendation for Salesforce stock stood at Moderate Buy as of 25 October, according to data from MarketBeat. In all, 30 analysts of the 35 that cover CRM rated the stock a ‘buy’. The other five rated it ‘hold’.

The average price target for CRM stood at $233.5 a share, resulting in a 41.2% upside potential based on today’s (26 October) closing price of $165.27.

Analysts' highest Salesforce stock price forecast for the next 12 months sat at $375 and the lowest at $150.

In regards to the firm’s latest performance and outlook, analyst Dan Romanoff from Morningstar commented on 31 May: “We believe Salesforce.com represents one of best long-term growth stories in software”.

He added: “Even as revenue growth is likely to dip below 20% for the first time at some point in the next several years, we believe ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer”.

FAQs

Is Salesforce publicly traded?

Yes. Salesforce is a publicly traded company. Its common shares are listed on the New York Stock Exchange (NYSE) under the ticker symbol CRM.

Who owns Salesforce?

According to data from MarketScreener, brokerage firms including The Vanguard Group, State Street and Fidelity Investments hold most Salesforce shares on behalf of their clients. Institutional investors including Amerindo Investment Advisors, Geode Capital Management and Fisher Asset Management are also listed among the top shareholders. The firm’s founder and co-CEO Marc Benioff reportedly owns 2.78% of the company.

Is Salesforce a good stock to buy?

Salesforce is a strong company in the service-as-a-software (SaaS) segment of the tech industry. Activist investor Starboard Value believes the firm is trading below its fair value due to its low profit margins and other factors discussed in the presentation they published recently.

This opinion and nothing in this article should not be considered a recommendation to invest in CRM stock. Investors should perform adequate due diligence before making any investment.

Keep in mind that these forecasts can be wrong and have been inaccurate in the past. Always do your own research before investing. Remember to never invest or trade more money than you can afford to lose.

Markets in this article

CRM
Salesforce Inc (Extended Hours)
248.99 USD
-2.24 -0.910%
ORCL
Oracle
138.94 USD
0.58 +0.420%
US500
US 500
5507.2 USD
-45.3 -0.820%
US100
US Tech 100
19526.6 USD
-224.4 -1.140%

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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