Salesforce stock: what CRM needs to boost margins without hurting growth

Salesforce (CRM) shares declined nearly 4% post-earnings despite exceeding Q2 estimates, driven by management's flat margin guidance for the year and uninspiring current quarter outlook. D.A. Davidson analyst Gil Luria attributes this underperformance to sputtering growth and elusive margin expansion, noting CRM lags competitors by 10-15 percentage points. Luria emphasizes the need for Salesforce to prioritize disciplined margin expansion through operational leverage and avoiding dilutive acquisitions, rather than aggressive top-line growth or short-term AI focus, suggesting activist investors may be necessary to enforce this strategic shift.

Analysis

Salesforce (CRM) shares experienced a nearly 4.0% decline in post-earnings trading, a reaction attributed not to its Q2 performance, which slightly beat consensus, but to a weak forward outlook. Management's guidance for flat margins for the year and an uninspiring forecast for the current quarter spooked investors, underscoring a critical issue: the company's growth is decelerating while margin expansion remains elusive. According to D.A. Davidson analysis, Salesforce's operating margins significantly lag competitors like Adobe and Palantir by 10 to 15 percentage points. The critique suggests that Salesforce's aggressive focus on AI may be a strategic misstep, distracting leadership from stabilizing its core business, which accounts for 98% of operations. The proposed path to recovery involves shifting focus from top-line growth and dilutive acquisitions towards disciplined operational leverage, particularly in G&A, sales, and R&D. The analysis posits that external pressure from activist investors may be necessary to enforce this strategic pivot toward profitability, even as the company holds significant financial firepower with a projected $15 billion in operating cash flow for fiscal 2026 and an expanded buyback program.

Key Decisions for Investors

• Investors should shift their primary focus from top-line growth metrics to operating margin execution, as closing the 10-15 percentage point gap with peers is now the critical factor for a stock recovery.
• It is prudent to temper near-term expectations for AI-driven revenue, treating it as a long-term initiative, and instead monitor for stabilization and performance within the core Sales Cloud and Service Cloud products.
• Consider renewed activist investor engagement as a potential positive catalyst for enforcing cost discipline, while viewing any new large-scale, dilutive acquisitions as a red flag confirming ongoing strategic concerns.