Unlike during the pandemic, 2022 has not been a good year for growth stocks. For example, the Nasdaq, which is home to many of these growth stocks, has sunk 24% year-to-date and by 12% in the past year. This has been due to the macroeconomic issues, including rising inflation and higher interest rates.
Consequently, investors have been pulling out of growth stocks, instead favouring value and income stocks. But as a long-term investor, I believe that this dip has offered an opportunity in many great companies, trading at historically low prices.
After Salesforce (NYSE: CRM) released its promising trading update on Tuesday evening, I’d buy more of this cloud-based software company.
The recent trading update
Despite the macroeconomic headwinds, Salesforce was able to achieve strong growth in the first quarter of 2022. For example, it delivered revenue of $7.41bn, which was up 24% year-on-year, while operating cash flow increased 14% year-on-year to $3.68bn.
Further, the group has $42bn in all future revenue under contract, which provides the firm with very strong visibility moving forward. However, the Salesforce stock price is still down 30% in the past year, which seems out of touch with the company’s performance.
These results also highlighted that demand remained strong and consumers were continuing to use the firm’s consumer relationship management services. Therefore I’m optimistic that, unlike many other growth stocks, the company has managed to deal well with the inflationary problems.
In the greatest sign of this strength, Salesforce increased its adjusted profit estimate for the fiscal year to $4.75 per share, up from previous forecasts of $4.63. This has been down to “disciplined decision-making”, which has allowed the firm to expand operating margins. In the current macroeconomic environment, signs that the firm is increasing profit margins demonstrates its quality.
Some of the drawbacks
Despite this excellent trading update, Salesforce is not immune to the problems facing other growth stocks. For example, the company has had to cut revenue guidance. Therefore, revenue for the full year is now expected to total around $31.75bn, down from expectations of $32bn.
Although it has been attributed to volatility in exchange rates, it may be a sign of slowing growth. This could have negative impacts.
There is also a risk that as inflation continues to soar, companies will have to cut costs further. This may lead them to cancelling subscriptions with Salesforce altogether, or spending less. Although the contracted revenues help mitigate this worry, it remains a risk that requires consideration.
What am I doing with this growth stock?
I already own Salesforce shares and, at these prices, I’m tempted to add more. Indeed, although a price-to-earnings ratio of 35 is not typically considered a bargain, it is historically low for Salesforce. In fact, in the past five years, it has had an average P/E ratio of over 200.
As the firm focuses on its profitability, I feel there is scope for increasing profits in the next few years. Therefore, I would certainly add more Salesforce shares to my portfolio.
