What happened
Shares of Salesforce (NYSE: CRM), the cloud software giant, were moving higher today after the company announced a price increase across its core products.
The news delighted Wall Street, which was no surprise, and the stock was trading up 3.6% as of 1:14 p.m. ET on Tuesday.
So what
In an announcement this morning, Salesforce said it would be increasing the list price by an average of 9% across key product lines like its sales cloud, service cloud, marketing cloud, and Tableau.
The company explained the move by saying it was its first list-price increase in seven years and that it had delivered 22 new releases since then, representing more than $20 billion in research and development. It also touted its new artificial intelligence (AI) products, including AI Cloud, Einstein GPT, and others.
The news, which shows the company's confidence at a time when much of the software industry is struggling with a slowdown in demand, earned it a round of applause from analysts. Raymond James maintained a strong buy rating on the stock, saying the price hikes aren't surprising and should be well received by the market.
Evercore ISI also called the price increase "pretty reasonable" as most of its peers push through annual increases of 4% to 5%, and said the move should be a tailwind going into 2024. The firm kept an outperform rating on the stock and a $240 price target, implying a 9% upside after today's gains.
Now what
With today's gains, Salesforce stock has now nearly doubled since its bottom last December. Investor confidence has returned as the company cut costs through layoffs, real estate rationalization, and other moves, and sharpened its focus on profitability after developing a reputation for wasting money on acquisitions and other poor strategic decisions.
The price hikes should give income a significant lift since the additional revenue should flow through directly to the bottom line, and the company is unlikely to see much attrition given the sticky nature of cloud software products. While Salesforce's top-line growth is still near all-time lows due to the tech slowdown, the tech sector appears to be emerging from that slump.
On an adjusted basis, the stock still looks reasonably priced at a forward price-to-earnings ratio of less than 30, and estimates are likely to move higher following the price hike.
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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Salesforce. The Motley Fool has a disclosure policy.
