Shares of Salesforce (NYSE: CRM) plunged in late May after the company announced its first-quarter results. However, the company has a number of growth initiatives in the works, while it has yet to see the potential benefits of artificial intelligence (AI) .
Let's take a look why Salesforce shares fell and why it currently may be the ultimate growth stock to buy with $5,000.
First-quarter struggles
Salesforce felt pressure in the first quarter, which showed up in weaker-than-expected revenue and current remaining performance obligations (CRPO) growth that fell below the analyst consensus for both metrics. CRPO is a metric used by sales-as-a-service (SaaS) companies that measures invoices that are expected to be recognized over the next year. It is an indicator of future growth.
The company's guidance for Q2 revenue and CRPO growth likewise came up short of analyst expectations, but the company did maintain its full-year revenue guidance of $37.7 billion to $38 billion. However, given the first-half pressures, investors sold off the stock as Salesforce's ability to meet its full-year forecast just got a lot more difficult.
The company cited elongated sale cycles, deal compression, and increased budget scrutiny for its woes. Notably, this is not something unique to Salesforce and has been cited by other enterprise software companies. The macro environment and a white-collar recession, where higher-income earners have gotten laid off and are having trouble finding new high-paying jobs, likely plays a role, as do companies looking to lay out their AI strategies and where to spend money. Meanwhile, Salesforce also felt some disruption from a recent shift in its go-to-market sales strategy.
Growth opportunities
Despite Salesforce's recent struggles in Q1, the company is well set up to continue to grow through a number of new product initiatives. The company has been doing well with multi-cloud deals, with nearly half of its 50 deals including six or more clouds in the quarter, including six of its top 10.
One of its biggest opportunities, meanwhile, is with Data Cloud, which organizes and unifies data from across Salesforce and other sources. Data Cloud is currently the company's fastest-growing product, and the solution was included in about a quarter of its deals over $1 million. Data Cloud brings its various cloud products together and makes them better, so the momentum with multi-cloud deals only makes the solution more attractive to customers. In Q1, Salesforce added more than 1,000 Data Cloud customers for the second straight quarter.
In addition, Salesforce is also seeing momentum with its Einstein AI solution. The company has thousands of customers using its AI copilots, while it has recently introduced other AI solutions including the prompt builder and Einstein Studio. Prompt builder helps employees finish tasks more quickly by building reusable prompts to summarize and generate content, while Einstein Studio helps users create and implement custom AI models.
Thus far, AI has been a double-edged sword for software companies like Salesforce. On the one hand, this technology offers great features and the potential to drive growth. However, given how quickly AI technology is evolving, it is also part of why software sales cycles are lengthening as companies evaluate their AI strategy moving forward and what software vendors will play key roles. While this has slowed growth in the near term, it is also the reason why software companies like Salesforce could be well set up to be the next AI winner moving forward.
Image source: Getty Images.
Inexpensive valuation
With Salesforce shares still off their highs, the stock trades at an attractive valuation of less than 7 times a forward price-to-sales (P/S) multiple, which is less than the more than 9 times P/S ratio it has often traded at in the past.
At the same time, Salesforce is seeing some excellent operating leverage in its business as it matures, which is leading to solid earnings growth. On that front, the stock trades at a forward price-to-earnings (P/E) ratio of 25.5 times and a price/earnings-to-growth ratio (PEG ratio) of less than 0.6 times.
CRM PS Ratio (Forward) data by YCharts
By all accounts, Salesforce's stock looks attractively valued given the potential growth opportunities ahead of it. Data Cloud looks like a nice growth driver, while its AI solutions should shift from a bit of a growth deterrent to fueling growth in the future. As such, Salesforce looks like a solid stock to buy right now.
Geoffrey Seiler 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 .
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