Salesforce: A Profit-Driven Phoenix Rising from the Ashes of Economic Uncertainty
Let’s talk Salesforce (CRM -0.45%), the software-as-a-service titan that’s been making waves in 2023. Despite the global economy doing its best impression of a rollercoaster, Salesforce has managed to rally an impressive 70% increase in shares this year. How, you ask? By focusing on profit margins like a hawk on a mouse. But let’s not get ahead of ourselves.
The AI Revolution and the Price of Progress
Salesforce has been busy. They’ve been introducing a smorgasbord of new AI features across their product range. The result? A decision to hike prices. The stock market seems to be on board with this move, but I believe it’s more than just a one-time boost for this AI software heavyweight.
Starting in August, Salesforce will be increasing the list prices for a wide array of their products by an average of 9%. This is the first price hike in seven years, and it’s not without reason. Salesforce has been on a product development spree, releasing 22 new releases, thousands of new features, and investing more than $20 billion in research and development.
The Cost of AI Innovation
This year, Salesforce has released a number of product updates, including its AI Cloud service, and Sales GPT and Service GPT. These AI-enhanced features were integrated by leveraging ChatGPT, a generative AI chatbot that can answer queries and solve problems from simple text prompts.
But here’s the catch: these AI features aren’t free. The computing costs for generative AI are high, and Salesforce needs to cover these costs. But if generative AI delivers on its promise of massive worker productivity increases, customers might just be willing to foot the bill.
The Strategy Behind the Price Hike
There are two other factors that make Salesforce’s price hike seem like a masterstroke.
First, many customers are being cautious with their expenses due to fears of a potential recession. By increasing list prices, Salesforce could potentially leverage this to close deals faster.
Second, Salesforce itself is in cost-cutting mode. After a bear market in 2022, activist investors pressured the company to cut costs and boost profit margins. The result? A “do more with less” mindset that’s now yielding results.
Is It Time to Buy Salesforce?
The price hike will contribute to Salesforce’s profitable growth this year and beyond. The shares aren’t cheap, trading for about 32 times trailing-12-month free cash flow, and just under 23 times next year’s expected free cash flow.
But Salesforce has been exceeding expectations this year with steady growth despite the economic situation. It’s also turning the corner toward more robust profitability faster than many expected. If you believe Salesforce can keep up the pace, this stock could be a timely buy for the long term.
