Strong Profitability for Salesforce, but Demand Environment Is Not Improving; FVE Cut to $220

For its fiscal third quarter, Salesforce delivered modest upside relative to our revenue expectations and more meaningfully outperformed our margin estimate despite foreign currency headwinds that continue to worsen. Fiscal fourth-quarter guidance, however, was slightly shy of our model. Sales cycle elongation and deal size compression that began in July intensified this quarter, while management commented they expect these conditions to persist into next year. We lowered our estimates for fiscal 2024 in anticipation of a persistently challenging macro environment and then also made some minor related smoothing adjustments to our model. As a result, we are lowering our fair value estimate for wide-moat Salesforce to $220, from $240 previously. On the positive side, management stated the firm continues to build a healthy sales pipeline, and the company bought back 11 million shares for $1.7 billion. Salesforce remains one of our top software picks and we applaud the company’s increasing focus on margins along with the newly implemented $10 billion buyback program.