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Salesforce stock is on pace for its best month since 2020. Morgan Stanley thinks it can still go higher.

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Salesforce Inc. stock could see its best monthly run since August 2020, albeit due to layoffs, a board shake-up and other moves to cut costs. But Morgan Stanley analysts on Monday said they still saw room to make operations leaner and boost profit.

Analysts at the bank raised their price target on Salesforce stock
to $236 from $228. They maintained their version of a buy rating on the stock.

Shares of Salesforce — whose software helps businesses share their interdepartmental data and use it more effectively — rose 0.7% to $165.70 on Monday, and are up 24.2% this month. Those gains follow a lengthy decline that began in 2021, following a surge in demand for digital resources during the first two years of the pandemic.

But as it makes profitability more of a priority, Salesforce in January said it would lay off around 10% of its staff and shrink the amount of office space and other real estate that it uses. Not long after, the company appointed three new board members, following pressure from activist investors. ValueAct Capital, Elliott Management and Starboard Value have stakes in the company.

The moves, the Morgan Stanley analysts said, represent Salesforce’s first big restructuring in its 23-year history, as it puts more focus on profitability after a long stretch of focusing on growth. The analysts said the company could do more to pare back costs, and ultimately put up earnings-per-share growth of more than 20%, based on expectations for a return to growth, expanding operating margins and a return of revenue percentage gains in the low- to midteens.

“While management’s pivot from a growth-oriented mindset to focus on profitability may be challenging, there remains significant opportunity to improve efficiency given overcapacity in sales, an excessive real-estate portfolio, and little
integration between the teams of acquired assets, in our view,” the Morgan Stanley analysts said in a research note.

“Further, involvement from ValueAct, Starboard and Elliott Management, with proven records of helping (or pushing) software companies to better realize inherent value, may help to bolster confidence Salesforce should continue to head in the right direction,” they continued.

The Morgan Stanley analysts also noted a CNBC report saying that Chief Executive Marc Benioff recently signaled that more layoffs could be on the horizon. And they also pointed to a Financial Times report that they said detailed the prospect of spinning off underperforming segments. Any such moves, the analysts said, would help boost margins faster.

The analysts said Salesforce’s employee count, as of the company’s fiscal third quarter, was up 46% compared with two years ago. Revenue over that time, they said, was up 45%, “suggesting limited improvement in efficiency over the last two years.”

Still, they said that Salesforce’s management lacked experience with large restructuring efforts. And they said that shareholder support for Benioff, while still high, had “slipped modestly,” based on a tally of board votes at annual shareholder meetings.

But the analysts said they expected Salesforce, which is already popular among larger-business customers, to at least maintain its current market share. However, they said expansion from smaller companies like ServiceNow Inc.
and HubSpot Inc.
could limit any gains.

Salesforce stock is down 29% over the past 12 months. The S&P 500 index
has fallen around 11% over that time.

Credit: marketwatch.com

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