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Is Salesforce stock a buy after the share price tumbled?

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It’s been a rough couple of days for Salesforce (NYSE: CRM) stock. As I write, the share price is down almost 10% since the market closed on Monday. But it’s also been a busy time for the company. It released its third-quarter earnings on Tuesday, and also announced a new co-CEO.

Let’s take a look to see if the recent share price weakness has presented me with a buying opportunity.

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Salesforce’s results

It’s best to start with the third-quarter results. Adjusted earnings per share came in at $1.27, which was an impressive feat against consensus estimates of $0.92. Revenue for the quarter came in at $6.86bn, which is an increase of 27% over the same period one year ago. This was about in line with analysts’ expectations for revenue.

Salesforce also raised its revenue guidance for its full fiscal year 2022, which is now for growth to be around 24%. It then reiterated revenue guidance of 20% for 2023.

These figures are good, in my view. The growth rate was strong, and the company upgraded its outlook for the coming year. So it’s not exactly straightforward as to why the stock has fallen.

However, US market valuations are currently rather high based on historical standards. Companies have to show exceptional growth to warrant these high valuations. If they don’t, and even worse, they miss analysts’ expectations, then share prices can fall significantly.

Looking at Salesforce’s valuation in particular, the stock does look pricey. On a price-to-earnings (P/E) basis, the shares are valued on a multiple of 65. After the company reiterated its revenue growth for 2023 at 20%, this translates into an earnings growth forecast of 11%. I’d want earnings to be growing more than this to warrant such a high P/E ratio.

A new co-CEO

The earnings release wasn’t the only news out of Salesforce this week. That’s because the company promoted Bret Taylor into a co-CEO role, to work alongside current CEO Marc Benioff. He was previously CTO at Facebook (now Meta), and at Salesforce he’s been COO since 2019.

The firm has grown substantially through acquisitions in recent years. The company acquired Tableau in 2019, which was followed by purchasing Slack in 2020. The appointment of Taylor as co-CEO seems prudent given how the business has evolved into a much bigger company of late.

I don’t attribute the recent Salesforce stock price weakness to the appointment of Taylor though. He’s highly experienced in the technology sector, and was promoted from within so will know the company very well. Taylor was also appointed the independent chair of the board of Twitter this week, so he will no doubt be busy in his new roles.

So is the stock a buy?

I view Salesforce as a quality business. It’s highly cash generative, and the forecast for operating margin this year is a high 18.6%. There’s integration risk to think about though, given how acquisitive the company has been. There are no guarantees that these businesses will be successful within Salesforce.

But it’s mainly the valuation that holds me back from buying the stock today. I’m keeping it on my watchlist to buy on any further weakness in the share price.

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Dan Appleby owns shares of Meta. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool UK has recommended Twitter. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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