Salesforce (NYSE:CRM) stock is a darling of the market, but if CRM stock has gotten ahead of its skis, so to speak, then it’s time to be cautious, not greedy. The smart strategy now is to just let the Salesforce share price drop before making a move.
Since Salesforce stock has already rallied sharply, investors assume that the company’s revenue will grow exponentially. However, there could be a mismatch between expectations and reality.
I don’t want anyone to learn a harsh lesson about what can happen when you chase after expensive stocks. So, let’s delve into the details and consider why it’s not the right time to buy CRM stock.
Salesforce’s Dividend Is Minuscule
Much like Meta Platforms (NASDAQ:META), Salesforce recently introduced its first-ever dividend. When we do the math, however, we’ll discover that Salesforce’s dividend is paltry and not really a game-changer.
Investors got really excited about Salesforce’s dividend because it’s new, but the quarterly distribution will only be 40 cents per share.
If the CRM stock price is $308 and the dividend stays the same ($1.60 annualized), then the annual dividend yield would only be 0.05% (one-half of one percent).
Granted, Salesforce also increased its share-buyback program by $10 billion. That’s encouraging, but would you buy a stock just because a company expanded its share-buyback program and initiated a tiny dividend?
I hope, for your sake, that the answer is “no.” Value-conscious investors should weigh Salesforce’s expected revenue growth against its share price before making a determination. Only then can you make a fully informed decision.
Salesforce’s Downbeat Revenue Forecast
So, here are the need-to-know facts. Salesforce guided for fiscal 2025 revenue of $37.7 billion to $38 billion, up 8% to 9% year over year. The midpoint of that range is $37.85%.
That guidance-range midpoint falls short of Wall Street’s consensus call for $38.62 billion in full-year revenue. In response to this, D.A. Davidson analyst Gil Luria provided cautionary commentary.
“Salesforce is guiding for only 8-9% growth (for the full year), which moves it out of the high growth category,” they wrote. “In order to make up for that, it is introducing a dividend, which is appropriate for the lower level of growth.”
As we already discussed, that dividend isn’t really anything to get excited about. Yet, the market has already pushed CRM stock from $200 to $300 during the past half-year, for a 50% gain.
Salesforce’s GAAP-measured trailing 12-month price-to-earnings ratio is now quite elevated at 73.43x.
Salesforce’s valuation is very high even though the company doesn’t anticipate strong revenue growth.
CRM Stock: Good Company, Not-so-Good Price
Don’t get the wrong idea. It’s perfectly fine if you like Salesforce as a company and want to get portfolio exposure to the cloud-computing market.
Chasing CRM stock after a 50% rally isn’t a wise move. A sensible strategy is to let the share price come down 10%, 20% or even more than that.
Then, you can confidently invest in Salesforce with a more favorable risk-to-reward balance.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
