Why Is Salesforce (CRM) Stock Rocketing Higher Today

What Happened:

Shares of customer relationship management software maker Salesforce (NYSE:CRM) jumped 5.9% in the afternoon session as markets roared back after an initially muted response to the Fed's rate cut, which sparked a renewed appetite for risk assets. While investors were expecting a reduction in rates from the US central bank, there was a bit of back and forth on whether the cut would be 25bps (a quarter percent) or 50bps (half a percent). 

The Fed ended up slashing its policy rate by 50bps (0.5%) to 4.75%-5.00%. This marks the first rate reduction in roughly four years. As a reminder, the Fed--under Chair Jerome Powell--began raising rates to tackle inflation coming out of the COVID-19 pandemic when a confluence of supply chain disruptions, labor shortages, and stimulus spending caused inflation to run hot. 

Looking forward, the Fed signaled that more cuts are possible in 2024/25. Putting it all 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 anything the market doesn't like, it's uncertainty. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. 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 the current value depends more on cash flows many years out in the future.

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What is the market telling us:

Salesforce’s shares are quite volatile and over the last year have had 5 moves greater than 5%. In context of that, today’s move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was 4 months ago, when the stock dropped 20.2% on the news that the company reported first quarter earnings results with key topline metrics including revenue and billings falling below expectations. 

The company experienced softer bookings in the quarter due to elongated deal cycles, deal compression, and high levels of budget scrutiny. It called out continuing pressure in the professional services business and also observed some volatility in the Licensing segment. 

Moving on, management expects the measured buying behavior observed in Q1 to continue throughout the fiscal year, which points to a challenging sales environment. As a result, it gave revenue guidance for the next quarter, which missed analysts' expectations. Full year subscription revenue guidance was also lowered. While the company maintained its revenue guidance for the full fiscal year, the expected growth rate of 8% to 9% is relatively modest compared to previous years. 

Lastly, the company expects stock-based compensation to be slightly above 8% of revenue, a modest increase from prior guidance. Overall, this was a bad quarter for Salesforce, as investors are likely to tame 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 from February 2024. Investors who bought $1,000 worth of Salesforce’s shares 5 years ago would now be looking at an investment worth $1,733.

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