Businesses are now relying more and more on optimization for success. The demand for Salesforce Inc.'s (CRM, Financial) services is visible in its top-line growth, which increased from $3 billion in 2012 to $26.5 billion 10 years later. Further, the company's operating income rose from $115 million in 2016 to $548 million by 2022.
Despite the current market conditions, Salesforce's price-earnings ratio remains at a high of 523.07. With many stocks trading at bargain prices, overspending for a tech stock looks odd.
In addition, there are several issues Salesforce is facing bother internally and externally. Over the past several months, the company has experienced a wave of executive exits, raising concerns among investors. At the same time, it recently announced it will reduce its workforce by 10%, as the company found itself overstaffed due to coronavirus-enforced hiring. The restructuring will also involve closing some of its offices. Analysts are concerned about the possible setbacks that layoffs could have on the company's progress and suggest that investors should factor in the costs of severance fees to be paid out in the coming months.
Salesforce has seen positive growth overall in the past few years. However, with recent issues, it is advisable to wait for the share price to drop before making any investment decisions.
Yet another executive leaves
News of an executive's departure would not have distressed investors if it were not the latest in a string of exits by high-level employees. On Jan. 11, Taher Elgamal, chief technology officer of cybersecurity at Salesforce, announced he is stepping down from his position. While Elgamal has left to become a general partner at Evolution Equity Partners, his resignation is part of a pattern as Executive Vice President Mark Carter left the company in November. Other big names that have left the company over the last few months include Tableau (DATA, Financial) CEO Mark Nelson and Slack CEO and co-founder Stewart Butterfield.
However, the announcement that was a gut-punch for many analysts and investors was that of co-CEO Bret Taylor, who will be leaving the company on Jan. 31. Taylor's exit shocked investors and analysts alike as he was often said to be next in line to take the company into the future. As a result, many interested parties are questioning the reason for Taylor's departure. The exodus has serious implications for the company as Salesforce's rating was downgraded by Atlantic Equities analysts, who cited the departures, among other reasons. The analysts have voiced they fear the company will lose out on future deals due to the top leaders leaving.
Further job cuts will incur expenses in the short term
In early January, Salesforce announced plans to lay off 10% of the workforce after a prior round of layoffs a few months ago. Macroeconomic headwinds battered the company in 2022, leading it to come up with a cost-cutting plan that unfortunately included firing around 8,000 employees. In addition to the layoffs, the company is looking to reduce costs by $3 billion to $5 billion by exiting some of its real estate properties and closing down offices across the U.S.
Co-CEO Marc Benioff acknowledged the company's hiring frenzy during the Covid-19 pandemic led to a bloated staff that was no longer necessary as demand for services and growth has slowed down exponentially. However, he also highlighted excess office space and a lack of profitable ideas from half of the company's account executives when discussing the cost restructuring process.
Investors should refrain from rejoicing at this news because, as per the company's comments, the series of changes will bring about severance charges of $1.4 billion to $2.1 billion, out of which $800 million to $1 billion will need to be dealt with in the fourth quarter of fiscal 2023. Given Salesforce's progress (or lack thereof) over the last few quarters, Bernstein analyst Mark Moerdler said the stock is in a "growth purgatory" while calling attention to the decelerating growth that has been ongoing for a while now and was only covered up by frequent acquisitions. He added that the job cuts will not make the difference the company wants and will accelerate the growth decline.
Acquisitions turned sour: Slack and Tableau
Salesforce has long been trying to compete with industry giants and has made many acquisitions to keep up.
Two of its biggest recent acquisitions were Slack, which it bought for $27.7 billion in 2021, and Tableau, which cost the company $15.7 billion, in 2019. The original goal behind the acquisitions was to expand its software into new areas, but they have not been very successful yet.
In regard to Slack, Liz Herbert, vice president and principal analyst at Forrester Research, said that Salesforce's purchase of Slack had not made it any more compelling than before. At the same time, Katrina Agust, chief information officer at iCarhartt Inc., commented that her firm did not delve deeper into the application after the acquisition.
According to Bloomberg, Tableau has suffered more than any other company division. The employees made up most of the numbers that were and will be let go. Slack's team is also coming under greater scrutiny and may be at higher risk of getting the axe than other departments.
As such, Salesforce may have hurt itself more by buying these businesses.
Takeaway
Salesforce has a strong presence in the industry, where it will likely remain. Although the future looks bright, the present situation does not seem particularly optimistic. It will take time for the company to get its costs under control and see solid growth across all of its businesses.
