Salesforce Set to Report Q3 Earnings: Buy, Sell or Hold the Stock?

Salesforce CRM is scheduled to release third-quarter fiscal 2025 results on Dec. 3.For the fiscal third quarter, the company projects total revenues between $9.31 billion and $9.36 billion (midpoint $9.335 billion). The Zacks Consensus Estimate for revenues is pegged at $9.34 billion, which indicates an increase of 7.1% from the year-ago quarter’s reported figure.Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.CRM anticipates non-GAAP earnings per share in the band of $2.42-$2.44 for the third quarter. The consensus mark for non-GAAP earnings has remained unchanged at $2.43 per share, which calls for a 15.2% increase from the year-ago quarter.Image Source: Zacks Investment ResearchSalesforce’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average surprise being 3.8%.Salesforce Inc. Price and EPS Surprise Salesforce Inc. price-eps-surprise | Salesforce Inc. QuoteLet’s see how things have shaped up before this announcement.Key Factors Likely to Shape Salesforce’s Q3 PerformanceSalesforce appears well-positioned to report strong third-quarter results, driven by its strategic focus on digital transformation and cloud solutions. With businesses globally undergoing digital overhauls, Salesforce's commitment to aligning its product offerings with customer needs is likely to have boosted its revenues for the quarter.The growing demand for generative AI-enabled cloud solutions has been a major catalyst for Salesforce. By embedding generative AI tools across its products, Salesforce not only enhances customer engagement but also strengthens its competitive position in the customer relationship management space. This forward-thinking approach may have significantly contributed to its top-line growth during the quarter.Salesforce’s ability to deepen relationships with leading brands across industries and expand its reach in key geographic markets remains a cornerstone of its growth strategy. The company’s increasing footprint in the public sector is likely to have provided a further boost, unlocking new growth opportunities during the third quarter.The acquisitions of Spiff and Airkit.ai have been pivotal in enhancing Salesforce's capabilities and diversifying its revenue base. These additions are likely to have played a role in driving higher subscription revenues, particularly across its core cloud services. Salesforce’s key cloud offerings, including Sales, Service, Platform & Other, Marketing & Commerce, and Data, are expected to have delivered robust growth.Our third-quarter revenue estimates for Sales, Service, Platform & Other, Marketing & Commerce and Data cloud services are pegged at $2.03 billion, $2.24 billion, $1.79 billion, $1.29 billion and $1.45 billion, respectively. We expect the company to report revenues from the Subscription and Support segment of approximately $8.8 billion and the Professional Services division of $537 million.However, a decline in software spending by small and medium businesses amid the macroeconomic uncertainty due to the pandemic and geopolitical issues across different parts of the world may have affected Salesforce’s fiscal third-quarter top-line growth. Further, stiff competition from Oracle and Microsoft is a concern, along with forex headwinds.However, the ongoing cost restructuring initiative, which includes trimming the workforce, is likely to have boosted Salesforce’s profitability in the third quarter. The company’s first-quarter non-GAAP operating margin expanded 210 basis points to 33.7%, mainly driven by an improved gross margin and the benefits of cost restructuring initiatives, which include the trimming of the workforce and a reduction in office spaces.CRM’s Price Performance & ValuationYear to date (YTD), shares of Salesforce have soared 25.5%, outperforming the Zacks Computer – Software industry’s growth of 16.9%. Compared with peers, CRM stock has underperformed SAP SE SAP and Oracle ORCL but outperformed Microsoft MSFT. YTD, shares of SAP, Oracle and Microsoft have surged 50.2%, 73.3% and 12.1%, respectively.YTD Price Return PerformanceImage Source: Zacks Investment ResearchNow, let’s look at the value Salesforce offers investors at the current levels. CRM stock is trading at a discount with a forward 12-month P/S of 7.76X compared with the industry’s 7.89X.Image Source: Zacks Investment ResearchSalesforce’s Slowing Sales Growth: A Key ConcernSalesforce, once a growth juggernaut known for its consistent double-digit revenue expansion, is now grappling with a marked deceleration in sales growth. In the first quarter of fiscal 2025, the company’s sales growth barely reached low double digits, a significant drop from the more than 20% annual growth it regularly achieved until fiscal 2022.This slowdown isn’t merely a short-term hiccup; it underscores deeper challenges both within Salesforce and the broader market. Economic uncertainties and geopolitical tensions are prompting businesses to tighten IT budgets, delaying or scaling back large investments. As a result, Salesforce’s ability to sustain its earlier growth levels has been significantly impacted.Moreover, Salesforce has pivoted from aggressive revenue expansion to prioritizing margin improvement. While this strategic shift has boosted short-term profitability through measures like workforce reductions and operational cost cuts, it has come at a cost. Investments in critical growth areas, particularly sales and marketing, have been scaled back, potentially impacting Salesforce’s long-term ability to capture market share and drive innovation.The company’s current trajectory suggests further slowing in sales growth. The Zacks Consensus Estimate indicates that Salesforce’s top-line growth is likely to settle in the mid-to-high single-digit percentage range for fiscal 2025 and 2026, far below its historical performance.This deceleration in revenues is also expected to weigh on earnings growth. Salesforce’s earnings per share are projected to witness a compound annual growth rate (CAGR) of just 15.3% over the next five years, a steep decline from the 42.9% CAGR it achieved in the preceding five-year period.CRM: In a NutshellGiven the challenges Salesforce is facing, it might be time for investors to reconsider their position. The company’s slowing sales growth is a serious concern that cannot be ignored. The bearish sentiment is underscored by this Zacks Rank #4 (Sell) company's underperformance relative to the broader market and its peers.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Holding on to Salesforce stock in the current environment could mean riding out a prolonged period of underperformance. For investors looking to maximize returns, selling the company’s shares now could be a prudent move.Free Today: Profiting from The Future’s Brightest Energy SourceThe demand for electricity is growing exponentially. At the same time, we’re working to reduce our dependence on fossil fuels like oil and natural gas. Nuclear energy is an ideal replacement.Leaders from the US and 21 other countries recently committed to TRIPLING the world’s nuclear energy capacities. 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