Salesforce the ‘Most Attractive Risk/Reward’ in Software – Morgan Stanley

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A Morgan Stanley analyst lowered the price target on Salesforce (NYSE:CRM) to $273 from $291, maintaining an Overweight rating on the shares in a research note Tuesday.

The analyst provided a Q2 preview, explaining that aligned with the broader group, Morgan Stanley’s checks were more mixed in Q2. However, they see a low bar in terms of investor growth expectations and little appreciation for the margin improvement story.

“While checks were mildly more mixed in Q2, commentary from the channel around incremental macro headwinds has been more benign than recent software earnings and peer commentary would suggest. Per our 2Q22 CIO Survey, Digital Transformation remains a key area of spend for CIOs, ranking #4 on overall priority and #3 on defensibility of spend, highlighting the potential for Front Office / strategic Digital Transformation initiatives to prove more resilient in the face of macro pressures,” wrote the analyst.

The analyst added that the stock trading at a deep discount to peers reflects investor concerns around the durability of Salesforce’s growth progressing into 2023 and the company’s commitment to margin improvement.

“On the back of recent analysis regarding FX impacts to Salesforce’s international business, we are lowering our FY23 topline numbers by ~$105M to give credence to an incremental strengthening of the US Dollar in Q2, while our terminal multiple comes down to 24X (from 25X previously). Our new base case price target of $273 implies 0.39X CY23e EV/S/G or 1.07X CY23e EV/FCF/G vs. large cap averages of 0.46X and 1.30X, respectively,” he said.

However, he added that “at ~0.6X EV/FCF/growth, a steep discount to peers, we see CRM as the most attractive risk/reward in software.”

Salesforce shares are down 1.85% in early Tuesday trading.

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