Salesforce Falls as Morgan Stanley Downgrades on Valuation

Customer-relationship-management specialist Salesforce is lower after a downgrade to equal-weight by analysts at Morgan Stanley.
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Salesforce.com  (CRM) - Get Report shares were lower on Thursday after the customer-relationship-management specialist was downgraded to equal-weight from overweight by analysts at Morgan Stanley. 

The investment firm maintained a $275 price target for the San Francisco company, indicating 8% potential upside from the stock's previous closing price. 

"At CRM's current growth, scale and market cap, an increasing focus on [free cash flow] and earnings is likely necessary for further price appreciation," said Morgan analyst Keith Weiss. 

"However, subscription model dynamics and management's growth philosophy may make that difficult near-term, pushing us to an [equal-weight] rating." 

The firm notes that with a $250 billion market capitalization, Salesforce is in the peer group with Adobe  (ADBE) - Get Report, Intuit  (INTU) - Get Report and Microsoft  (MSFT) - Get Report, which are all valued primarily on a price-to-earnings basis by investors. 

However, given the current scale of Salesforce and a growth strategy that is heavily incorporating mergers and acquisitions, Weiss says, Salesforce needs to focus more on earnings-per-share growth to drive shares higher. 

"The good news is our updated [software-as-a-service] X-ray suggests Salesforce currently has the unit economics to drive operating margins to 28% in 5 years (based on our growth estimates) and 33% in 10 years, as growth slows towards 10%," Weiss said. 

Morgan Stanley's model supports a path to nearly $40 billion in revenue for Salesforce by 2024.

But a lack of confidence in significant margin expansion leaves the investment firm "unable to push our current price target of $275 higher."

Salesforce shares at last check were 1.4% lower at $250.63.