Starboard Value's Jeff Smith says Salesforce has 'a lot more to go' and can increase profitability
Salesforce has become more profitable in the past few years, but one activist investor says there's more for the software company to do.
Salesforce shares jumped 98% in 2023 in part after the business software maker increased its adjusted operating margin after Starboard Value and other activist investors raised concerns about the company's financial performance. Starboard now sees more room for improvement.
Salesforce Shares Soar 98% in 2023 as Activist Investors Push for Efficiency and Profitability
In a remarkable turnaround, Salesforce shares have jumped a staggering 98% in 2023, driven in part by the company's efforts to improve its financial performance and address concerns raised by activist investors. Starboard Value, a prominent activist firm, has been instrumental in pushing Salesforce to increase its adjusted operating margin, and its efforts have yielded significant results.
The Rule of 40, which suggests that a company's revenue growth rate and profit margin should add up to at least 40%, has become a widely accepted benchmark in the software industry.
This metric has gained traction in recent years as investors have become increasingly concerned about the impact of rising interest rates on software companies. Starboard Value has been a vocal proponent of the Rule of 40, arguing that Salesforce, despite its dominance in the customer relationship management (CRM) software market, has historically prioritized growth over profitability.
Starboard Value first revealed its holding in Salesforce in 2022, and the company's subsequent efforts to improve its financial performance have been impressive. Salesforce has taken significant steps to cut costs, including cutting thousands of employees, accelerating its timeline for widening its adjusted operating margin, and making significant changes to its cost structure. As a result, the company's adjusted operating margin has improved, and its shares have responded accordingly.
In a recent presentation, Starboard Value outlined its vision for Salesforce's future, highlighting the company's potential to become even more efficient and profitable. The Firm noted that other large software companies, such as Adobe, Intuit, Microsoft, Oracle, SAP, ServiceNow, and Workday, spend less on sales and marketing and general and administrative costs as a percentage of revenue, and argued that Salesforce can catch up. Starboard also called on Salesforce to commit to adhering to the Rule of 50 by the 2028 fiscal year, and laid out two scenarios that would achieve this goal.
Starboard Value also highlighted the potential of Agentforce, a technology for automating customer interactions that Salesforce discussed at its Dreamforce conference in September. The firm believes that Agentforce has the potential to boost revenue growth and drive further efficiency gains.
In response to Starboard's presentation, a Salesforce spokesperson told CNBC that the company "appreciates feedback and dialogue with our investor base" and that Starboard "continues to be a constructive shareholder in our conversations." Despite the positive news, Salesforce shares slipped 1% during Tuesday's trading session.
The remarkable turnaround in Salesforce's shares in 2023 is a testament to the power of activist investors in driving change and improving financial performance. Starboard Value's efforts have pushed Salesforce to prioritize efficiency and profitability, and the company's results have responded accordingly. As the software industry continues to evolve, it will be interesting to see how Salesforce and other companies respond to the challenges and opportunities presented by the Rule of 40 and other metrics.
Some key statistics that highlight Salesforce's progress include:
Overall, the remarkable turnaround in Salesforce's shares in 2023 is a testament to the power of activist investors in driving change and improving financial performance. As the software industry continues to evolve, it will be interesting to see how Salesforce and other companies respond to the challenges and opportunities presented by the Rule of 40 and other metrics.
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