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In the first week of November, Salesforce Inc. (NYSE: CRM) announced it would let go of employees after demand lightened for its enterprise software. This is certainly not good news and it touches on the larger concerns that have affected earnings for front-office software this quarter.

Salesforce also recently lowered its guidance, further feeding investor worries about the strength of the stock.

As the leading customer relationship management provider, Salesforce shares had followed a steady, comfortable climb since its IPO on June 23, 2004, when it opened at $11.

Salesforce Could Have Significant Growth Potential

A current P/S of 5.1 puts the stock at its lowest valuation since the market crashed in 2008. This was advantageous for Salesforce as it transformed those lows into record-breaking returns. The current stock spiral somewhat echoes that crash so there is a pretty good chance investors will expect a similar rebound.

However, Salesforce's revenue has tripled over the past five years and it continues to take on new projects with excellent momentum. Since the CRM industry should grow by 11% compound annual growth rate (CAGR) for the next five years or so, the largest firm in the space should expect to realize parallel growth.

Earnings Strong Despite Industry Complications

The company has realized an upward earnings trend over the last couple of years. As a matter of fact, earnings have beat the annual estimate for at least the last four years and beat the range every year but 2021. While annual earnings have increased from $2.75 to $4.92 between 2018 and 2020, they slipped back down to $4.78 last year.

The earnings trend for the most recent four fiscal quarters helped shed a little light on what the broader industry has experienced. For example, the estimated earnings range high for Q3 of 2021 was $0.99 but actual earnings came in significantly higher, at $1.27. By the end of Q4, earnings fell back down to $0.84, beating the estimate by nearly a dime but holding below the range high by about 20 cents.

Quarterly earnings beat the estimate again in the first quarter of 2022. Making up some of the ground lost over the previous three-month period, actual earnings of $0.98 beat the estimate by just four cents. Fortunately for Salesforce, the rebound was quick as actual earnings for Q2 of 2022 hit the range high of $1.19. It seems things are back on track, even with the minor downsizing.

Peers Show Similar Struggles

A look at the broader industry reveals that other companies have faced tough decisions. Since the stock has lost some steam and earned its "moderate buy" rating, short-term interest remains healthy. That said, the stock is down more than 41% on the year with return on equity (ROE) and return on assets (ROA) barely breaking 3% and 2%, respectively.

By comparison, Adobe Inc. (Nasdaq: ADBE) is also down more than -41% year to date but it projected earnings growth (10.08%) at nearly half that of CRM. While Adobe's 32.63 price-to-earnings (P/E) ratio is certainly not the best, it is easily more favorable than CRM's 274.15 P/E.

Adobe also has an impressive 28% net margin, which is significantly better than Salesforce's paltry 1.8%. In addition, Adobe's ROE and ROA are about 10 times that of Salesforce.

Despite all of this, analysts have still just given ADBE a "hold" rating.

What about comparing Salesforce with Autodesk Inc. (Nasdaq: ADSK)? Down only slightly more than -25% on the year so far, Autodesk has the least amount of ground to recover but may also have quite the uphill climb in store.

For one, its upside is only 22.2%, meaning analysts expect it to perform about half as well as Salesforce. In addition, Autodesk has a moderate net margin of 11.76%, which means return potential is pretty stable (and 10 times that of Salesforce).

Finally, Autodesk has a price-to-sales ratio (P/S) of 10.35, which is nearly twice that of Salesforce (and only slightly higher than Adobe). This means that Salesforce might find a bit more comfortable growth if it improves its efficiency and increases its returns. In all, the "moderate buy" rating may seem reasonable. 

Article by Keala Miles, MarketBeat

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