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Salesforce (NYSE:CRM) shares are trading more than 2.5% lower in pre-open Wednesday after Bernstein analysts downgraded to Underperform from Market Perform.
The analysts see CRM stock experiencing “a lot more pain” amid “numerous catalysts that may drive a lower multiple.” The new price target of $119 per share (down from the prior $134) implies a downside risk of almost 20% based on yesterday’s closing price.
“Comparing the valuation of Salesforce against peers we find that Salesforce is overpriced, as it has a similar growth rate to peers but lower margins and lower quality earnings,” they wrote to clients in a downgrade note.
The analysts add that Salesforce has suffered from decelerating growth for years, however, the company managed to mask this trend by M&A deals.
“With the tailwinds from M&A no longer enough, core markets approaching cloud saturation, competition increasing, and macro issues hitting growth, management is aggressively pivoting to driving margins. But the cuts are going to negatively impact efficiency, growth, and customer/employee satisfaction. Margin improvement will be less than expected in our view, and will appear over multiple years,” the analysts added.
Net-net, Bernstein analysts argue that a huge lift to margins is “unlikely to occur,” hence they move to Underperform and expect the CRM stock to underperform the market.
