Salesforce (NYSE: CRM), seen as a bellwether for software companies, experienced a massive sell-off on Thursday after announcing earnings. Its results raised concerns about a potential industry-wide slowdown. The discussion explores the impact of shifting IT budgets towards AI and the resultant pressure on traditional software spending. It also highlights potential opportunities to invest in strong-performing companies that have seen their shares plummet after Salesforce’s earnings.

What Software Stocks Are Attractive After Salesforce’s Crash?

A summary of the key points from this discussion with 24/7 Wall Street Analysts Eric Bleeker and Austin Smith can be found below:

• Salesforce reported earnings after the bell on Wednesday and they were bleak enough to almost the entire SaaS sector. 
• Salesforce itself was down more than 20%, however, the damage spread across the entire software-as-a-service sector. 
• In fact, according to Bank of America analysts software stocks had their worst move versus the Nasdaq in 10 years!
• By morning on Thursday, you had other software stocks trading down at pretty steep levels: 
  • ServiceNow down 9%
  • Cloudflare down 7%
  • Crowdstrike down 6%
  • Monday down 6%
• The big question – What does this say about Salesforce versus the industry at large?
• First: There’s a lot of enthusiasm about generative AI across technology stocks, but as spending shifts to AI that will pull spending away from other categories.
• We’ve seen this in areas like servers where AI servers are booming, but traditional servers are seeing sales plummet. 
• So you’re always balancing incremental demand for AI products and services away from what budgets might be declining to make room for AI spending.. In most of technology, AI demand isn’t pure upside.
• In the case of Salesforce, their revenue projection at the high end was guided to $9.25 billion last quarter versus estimates of $9.4 billion. That may not look like a massive miss but it does take Salesforce back to only about 8% sales growth next quarter.  
• One question is how much of this is just Salesforce’s execution versus a larger problem of IT budgets pulling back.
• If IT budgets are pulling back, the problem is there’s generally been pretty strong multiple expansion across SaaS stocks. That is to say, measures like Price-to-Sales and P/E ratios have stretched across the past year.
• But, there are some stocks we’d advise paying attention to on the pullback.
• The first up is Monday.com (Nasdaq: MNDY).
• They already reported first-quarter earnings that were above expectations and it’s a company that’s been executing at an extremely impressive rate.
• The company’s not cheap at more than 10 times sales, but it’s also producing an impressive amount of cash flow – about $260 million worth ex-SBC the past 12 months. In addition, sales growth should land at about 30% this year, which is a big difference from Salesforce’s current 11% projections for the entire year.
• Another name that’s just executing well and has an end market that should perform well through growth in AI is cybersecurity stock Crowdstrike (Nasdaq: CRWD). 
• The number one knock against Crowdstrike isn’t how large their market can get or their ability to take market share. Critiques from the financial community are almost purely valuation-based. 
• So, if it continues to decline as investors flee the software space, Crowstrike could be a name you consider adding based on the company’s ability to execute and long-term prospects. Crowdstrike will almost surely never be cheap, so industry-wide drops are an excellent time to start building a position if you don’t already own the stock 

Transcript:

All right, Eric, I’m looking at some of the news this last week, and we saw that Salesforce stock absolutely crash.

It was down maybe close to 20% roughly, and I’m approximating there.

But the important thing is, what does this say for the broader sector?

Is this the time to flee software stocks?

In many ways, Salesforce is kind of seen as the mature, responsible new tech company.

It’s a bellwether for the other tech companies.

It doesn’t have quite the volatile narrative of an NVIDIA, but it’s been there.

It’s been deeply profitable.

It seems to have good leadership.

It’s non-controversial.

And people have always considered Salesforce sort of like the best of the breed of the current new tech companies, well-run, profitable, great margins and good growth rates.

So is this bellwether now becoming a canary in the coal mine for software stocks?

What’s going on?

Yeah. You know, I look at the reaction to Salesforce reporting earnings and I’m having a hard time remembering where a stock sank an entire sector this much.

Salesforce itself goes down more than 20 percent.

The next morning other stocks when I look Thursday morning I saw a ServiceNow down nine percent, Cloudflare down 7%, CrowdStrike 6%, Monday.com down 6%.

And as you noted, the big question is, what does this say about Salesforce versus maybe an entire industry-wide slowdown?

So first, I think there’s a lot of enthusiasm about generative AI across technology stocks.

But as spending shifts to AI, that does put some pressure from other categories.

IT budgets are only so big.

And if you’re putting a lot of budget here, it’s going to take away from other areas.

So, you know, if we look at servers, for example, there is a boom in AI servers, but at the same time, traditional servers are seeing a slowdown because the budgets are going to buying AI servers.

So again, it’s what kind of incremental demand is going to get siphoned off.

In the case of Salesforce, there’s a lot of enthusiasm about their AI products, but that might just be more down the road.

And in the current environment, some of this spending shift is actually moving away from them.

They guided towards $9.25 billion in the next quarter in sales.

Estimates were $9.4 billion.

That’s not a massive miss.

But this is a company that because, as you know, it’s a bellwether, there’s just expectations they’re going to be able to deliver on that demand.

And let’s face it, they’ve been generally pretty richly priced throughout their existence.

So the question is, is this Salesforce’s execution versus these IT budgets pulling back?

I would consider a couple names that are pulling back based on this news.

The first one would be Monday.com.

They’ve already reported the first quarter earnings and they were above expectations.

This is a company that’s in a similar space, but it’s executing at an extremely impressive rate.

It’s a company that a lot of people won’t be able to buy because it looks too expensive, and maybe it coming back gives you an opportunity to do that.

Along those same lines, another company I would look at in the cybersecurity space is CrowdStrike.

They were down a deep amount on Thursday.

The number one knock against them is not how large their market can get.

It’s not their ability to take market share from competitors.

It’s almost just purely valuation.

So if I’m an investor and I’m looking at Salesforce’s decline, CrowdStrike, it’s never going to be a cheap company.

So I’m looking for industry-wide disruptions where I can either start a position or be able to add to it if it’s a stock I already own.

Point being here, Austin, I think investors who are seeing an industry wide sell off, I would look at the companies that are best executing and try to add or either start a new position in them.

I don’t think this is a reason to fully get out of software as a service stocks in general.

Yeah absolutely not.

You know, as you said, you know, this could be one of the rare looks that we can see to get one of these great companies at a discount.

And if we look at, you know, a lot of Salesforce’s products, this slowdown makes sense.

A lot of, you know, a lot of times they sell into other tech companies.

They’ve got marketing suites and CRM suites in an environment where that starts to slow down or as you said in addition to that the tech companies are shifting budget to more hard tech and buying chips right now.

That doesn’t mean that these companies aren’t going to put money into marketing services and these other products.

Again, it’s just they’re trying to match their investment to the current reality.

And of course, it will come back.

So this could be a great time to pick up a world class company that has a really wide suite of products on the cheap, simply because tech companies are shifting budgets to other investments at this time.

But that’s not going to be true forever.

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