Salesforce (CRM) continues to navigate a challenging environment, with its Q2 FY25 report reinforcing concerns over slowing revenue growth. However, there’s more to the story than just top-line numbers. While growth may be cooling, Salesforce is making notable progress in improving its profitability. This may suggest that the market’s reaction may be overly pessimistic, especially given the stock’s prolonged decline since February. With Salesforce now prioritizing margin expansion and free cash flow generation, which positions the company well for long-term value creation, I am bullish on the stock.
Is Salesforce’s Slowing Revenue a Concern?
Despite the recent slowdown in Salesforce’s revenue growth, I remain bullish on the company’s long-term prospects. In Q2 FY25, Salesforce posted $9.33 billion in revenue, reflecting an 8.4% year-over-year increase. Although this represents a deceleration from last quarter’s 10.7% and last year’s 11.4%, and a continued fall from the double-digit growth that once defined the company’s performance, Salesforce still met Wall Street’s estimates. This solid performance amidst a challenging environment reinforces my confidence in Salesforce’s ability to drive substantial future growth.
In addition, management’s revenue guidance for Q3 FY25 points toward growth of around 7%, indicating further deceleration. Even if Salesforce manages to meet or slightly beat its targets, it’s clear that the days of rapid revenue growth are behind us, at least for now. This trend is unlikely to change in Q4 as well, with Salesforce maintaining its full-year revenue guidance of $37.7 billion to $38.0 billion, which implies an 8% to 9% growth for FY25.
In this context, I understand the market’s recent skepticism toward the stock and its cautious approach, as reflected in the share price. However, my bullish outlook is less focused on Salesforce’s revenue growth and more on its bottom-line progress, where the company has truly excelled in recent times.
CRM’s Profitability Gains Momentum
Transitioning to Salesforce’s margins, I remain optimistic about the company’s future, as it has been laser-focused on improving its margins in recent quarters. In Q2 FY25, Salesforce posted a GAAP operating margin of 19.1%, up 190 basis points year-over-year. On an adjusted basis, the operating margin reached an even more impressive 33.7%, marking a significant 210 basis point improvement compared to the same period last year. These margin improvements highlight Salesforce’s successful strategy to enhance profitability and strengthen its long-term financial position.
Moreover, Salesforce’s margin expansion is a product of disciplined cost management and operational efficiency. The company has been working on cutting down expenses and optimizing its resources, allowing it to boost profitability even as revenue growth tapers off. Evidently, despite the single-digit revenue growth, adjusted net income grew by 19.1% year-over-year to $2.5 billion, and free cash flow surged 20% to $0.76 billion.
While this shift from growth to profitability may not be as exciting for some investors as double-digit revenue growth compounding quarter after quarter, the current setup does make Salesforce a more sustainable and attractive investment in the long run. Notably, Salesforce managed to sustain double-digit revenue growth for 88 consecutive quarters (Fiscal Q4-2004 to Fiscal Q1-2025). Therefore, shifting focus to earnings growth is not only a natural progression as the company matures but also a positive step, positioning the company to deliver more robust capital returns—and, by extension, potentially see higher share prices—over time.
Salesforce Offers Notable Upside
Salesforce’s stock has underperformed the overall market year-to-date, with the market likely attempting to digest the implications of its top-line slowdown. However, I view this as an opportunity rather than a setback. The strong earnings growth coupled with the lagging share price has resulted in an increasingly compelling valuation.
More specifically, the company’s forward P/E ratio currently stands at around 23.8x. Further, free cash flow is expected to reach $11.95 this year, implying a P/FCF of 19.9. Both valuation levels are some of the most attractive Salesforce has seen in recent years.
Moreover, Salesforce utilizes its improved profitability to reward shareholders through its share buyback program. In Q2, the company repurchased $4.3 billion in stock. I believe the mix of an attractive valuation and growing capital returns should translate to a notable upside moving forward.
Is CRM Stock a Buy, According to Analysts?
Peeking at Wall Street’s view on the stock, Salesforce has a Moderate Buy consensus rating based on 27 Buys, eight Holds, and one Sell assigned in the past three months. At $306.83, the average CRM stock price target suggests 24.14% upside potential.
If you’re unsure which analyst you should follow if you want to buy and sell CRM stock, the most accurate analyst covering the stock (on a one-year timeframe) is Keith Bachman from BMO (BMO) Capital, with an average return of 20.27% per rating and a 78% success rate.
Key Takeaway
To sum this up, Salesforce’s latest earnings report proves that the company is in a transition phase. The days of explosive revenue growth may be over, but Salesforce’s focus on profitability, margin expansion, and cash flow generation is paying off. We are, therefore, entering a new chapter in Salesforce’s story—one where the company is less about chasing growth at all costs and more about delivering sustainable, long-term value. The market may remain cautious, but Salesforce’s strong operating performance, attractive valuation, and growing capital returns suggest that the stock still has plenty of potential.
