Salesforce Q2 Earnings Preview: Potential Growth Slowdown Ahead, Says Citi
As we gear up for Salesforce's (NYSE: CRM) upcoming earnings announcement, leading analysts at Citi have delivered a mixed forecast. While the Q2 results are anticipated to meet market expectations, Citi's experts warn of a potential deceleration in growth during the latter half of the fiscal year.
Balanced Yet Cautious Outlook on Salesforce's Performance
Citi maintains a "relatively balanced view" on Salesforce's upcoming earnings. The analysts acknowledge that Q2 estimates are achievable but emphasize caution for the second half of the fiscal year. Partner inputs have been tepid, suggesting that Salesforce may face slower growth due to tougher year-over-year comparisons and softer demand in certain segments.
Key Concerns: Tough Comparisons and Demand Weakness
One of the primary concerns highlighted by Citi is the risk to Salesforce's Q3 and FY25 Current Remaining Performance Obligation (cRPO) estimates. The analysts point to "tough comps" from last year's substantial deal with Amazon Web Services (AWS) and the impact of previous price increases. Citi's own cRPO estimate for Q3 is about one point below the market consensus, reflecting these apprehensions.
Tepid Demand and Budget Optimizations
Recent checks with Salesforce partners have revealed a "still tepid and elongated demand environment," with businesses focusing on budget optimization. While there is strong demand in the public sector and for core products like Sales Cloud and Service Cloud, interest in newer offerings such as Data Cloud and generative AI (GenAI) products has been lackluster. "Data Cloud is said to be of lower priority with little interest and complex pricing," Citi noted.
Updated Price Target Amid Sector Re-Rating
Despite these concerns, Citi has raised its price target for Salesforce to $290, up from $260. This adjustment is based on an updated valuation framework that considers the sector's re-rating. However, the analysts caution that the journey ahead may involve weaker execution, particularly in the latter half of the fiscal year.
What This Means for Investors
In essence, while Salesforce's Q2 results are expected to be robust, Citi advises investors to brace for a potential slowdown in growth as the company navigates the upcoming challenges. The caution stems from tougher year-over-year comparisons, a tepid demand environment, and prioritization of budget optimizations by businesses.
Breaking It Down for the Everyday Investor:
- Q2 Earnings: Salesforce is likely to meet expectations for this quarter.
- Future Growth: Growth might slow down in the second half of the fiscal year.
- Concerns: Tough comparisons with last year's performance and softer demand in new product areas.
- Price Target: Citi has increased Salesforce's price target to $290, reflecting a more favorable valuation framework.
- Investor Impact: Be prepared for potential volatility and slower growth, particularly in the latter part of the fiscal year.
By understanding these key points, you can make more informed investment decisions regarding Salesforce and anticipate how these factors might impact your financial portfolio.