Salesforce: Jefferies hikes PT on strong earnings, flags slowing margin growth

Investing.com– Jefferies increased its price target for Salesforce Inc (NYSE:CRM) on strong quarterly results, but flagged concerns about slowing improvements in profit margins and weaker growth in recently acquired businesses.

Salesforce’s revenue grew by 8.3% in the third quarter, beating analysts’ expectations of 7.2%. Subscription sales rose by 9.1%, with strong demand for its core sales and service cloud products.

Jefferies hiked Salesforce Inc’s price target to $425 from $400, while maintaining a “Buy” rating.

After the results announcement, company shares jumped more than 11% to $366.30 in extended trading o Tuesday.

While Salesforce’s operating margin of 33.1% exceeded expectations, Jefferies pointed out that the rate of improvement has slowed. Margins grew by 1.9 percentage points compared to an average increase of nearly 3 percentage points in recent quarters. Jefferies sees potential for Salesforce to expand its margins further, as peers in the software industry generally operate with margins in the low 40% range.

The brokerage also flagged weaker performance from Salesforce’s acquisitions. Growth at MuleSoft dropped to 1% from 13% in the previous quarter, while Tableau and Slack saw slower gains of 5% and 8%, respectively.

On a positive note, Salesforce’s new Agentforce platform showed early promise, with 200 deals closed in its first week, said analysts at Jefferies. However, they do not expect Agentforce to have a big impact on growth in the near term.

Salesforce’s stock has risen over 40% since its Dreamforce event earlier this year, reflecting optimism about its future. Even after this rally, Jefferies believes the stock remains undervalued, trading at a discount to its competitors.

The brokerage remains confident in Salesforce’s ability to grow its revenue and profit margins.