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What Needs to Happen for Salesforce Stock to Work in 2021

Courtesy Salesforce

With the year almost over, we’re taking a look at all 30 stocks in the Dow, starting with the worst performers— Boeing and Walgreens Boots Alliance —and working our way up to the highest-flying stock in the benchmark— Apple. The ranking may shift before the close of 2020 trading, but the stories behind the stocks shouldn’t.

Salesforce.com (ticker: CRM) shares had a perfectly fine first eight months of the year, riding along the wave of growth in cloud computing—a trend it started, by the way. Salesforce is the pioneer and largest player in the software-as-a-service trend, and that has been exactly the right place to be during the pandemic.

But two noteworthy things happened to complicate things.

On Sept. 1, Salesforce was added to the Dow Jones Industrial Average. Unfortunately for everyone, the stock closed at its highest level of the year that day. In fact, it was the best closing level for the stock ever. As of Sept. 1, the stock was up 73% for the year; now the gain has been paired to 42%. Had Raytheon (RTX), one of the companies Salesforce replaced, been left in the index, the Dow Industrials would be more than 400 points higher today. Oops.

The one factor weighing the most on Salesforce shares has been its agreement to acquire the collaboration software company Slack (WORK) for $27.7 billion. Slack is a useful communication tool; Barron’s basically uses it everyday. But the price tag struck the Street as, well, excessive.

Slack has yet to reach $1 billion in annualized revenue, and the company faces intensifying competition from Zoom Video (ZM), RingCentral (RNG) and, in particular, Microsoft (MSFT) Teams. There is a sense on the Street that Salesforce is reaching, and that simply feeding Slack into the much larger Salesforce sales team will not be enough to make the deal work.

Investors have now slashed Salesforce’s market cap by more than the total value of the proposed transaction. Until there is evidence the deal is working, analysts are likely to remain skeptical.

Salesforce is playing on some important trends here: growth in the cloud, subscription-based software revenue models and now collaboration tools. But for the stock to work, the company needs to convince the Street that buying Slack—rather than simply working with them—was a good idea.

Write to Eric J. Savitz at [email protected]

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