Salesforce rallies as profitability push pays off

(Reuters) – Salesforce rallied 5% on Thursday after its strong earnings report showed that cost cuts were working and demand was holding up better than expectations in a turbulent economy.

The business software firm behind workplace-messaging tool Slack and data analytics tool Tableau was set to add about $10 billion to its market value, based on its premarket share price of $227. The stock has risen more than 60% so far this year.

Salesforce raised its annual forecast for adjusted operating margin on Wednesday to about 30% from 28%, with CFO Amy Weaver stressing the new figure “is a floor, not a ceiling”.

Wall Street analysts lauded the move, noting the benefits from an aggressive profitability push at a company that has traditionally focused on growing bigger through acquisitions.

After a nudge from activist investors earlier in the year, the Marc Benioff-led firm has laid off thousands, reduced office space and dialled back employee perks this year to prop up profitability that has for years trailed rivals.

The “ceiling is the roof” for margins, analysts at Raymond James said. The brokerage was among the 20 that lifted their price targets on the stock, pushing the median view to $253, according to Refinitiv data. That is nearly 18% higher than the stock’s last close.

Wednesday’s report also eased some concerns about slowing growth at the company.

While the 11% rise in second-quarter revenue was much slower than historic growth rates of around 20% to 30%, the figure breezed past Wall Street expectations, and Salesforce also raised its annual revenue forecast.

The company has tried to navigate a downturn in tech spending by rolling out a suite of artificial intelligence features and raising prices for the first time in seven years.

The report should drive up investor confidence in the company, brokerage Raymond James said, adding that “shares are simply too low priced” for a company executing well in a tough economy.

Salesforce trades at 25 times its forward 12 months earnings estimates, compared with the industry median of 15.14.

(Reporting by Aditya Soni in Bengaluru; Editing by Shounak Dasgupta)