What's going on?
Salesforce, the well-known sales management software provider, saw its stock sell off 6% after it reported financial results that have some investors worried its growth is faltering.
What does this mean?
Salesforce has been, ahem, a force to be reckoned with: the popularity of its cloud-based software has skyrocketed along with its revenue and stock price (which is up ten-fold in the past decade). But as rivals such as Oracle and Microsoft muscle in on Salesforce’s turf (better late than never…?), there’s a concern that Salesforce’s future growth will take a hit. On Wednesday, it reported better-than-expected revenue and profit but said that it didn’t expect to make as much revenue in the next quarter – and that appeared to spook investors.
Why should I care?
For the stock: Investors are concerned that Salesforce needs to “buy” its growth.
Salesforce spent $4 billion on buying other companies in the past six months, which is by far its biggest spending spree. Salesforce’s acquisitions, collectively, are giving a boost to its revenue immediately and might set it up well for future growth (e.g. it can integrate its acquisitions into its existing products to make them better). But buying companies comes with execution risk: what if Salesforce pays a lot of money for a company that doesn’t drive future growth as much as expected?
The bigger picture: Salesforce is kind of like a highly paid professional athlete – and that makes its stock price vulnerable.
If your favorite sports team signs a star player for lots of money, you and everyone else expect a lot of production out of them. If they hit a bit of a slump, the criticism comes much quicker than for a no-name player. Salesforce is similar: investors have sky-high expectations for it because it has a high stock price compared to metrics like their overall profit (relative to other companies). Salesforce is still growing at a monumental rate: revenue climbed more than 20% versus one year ago – which is massive for a company of its size. It’s a good example of how top-performing stocks are vulnerable to stark selloffs for, seemingly, minor slumps.