Stocks

Salesforce.com in Advanced Talks to Buy Workplace Communication App Slack; Shares Down Over 5%

Salesforce.com Inc, an American cloud-based software company headquartered in San Francisco, is in advance talks to buy workplace messaging application Slack Technologies, according to the Wall Street Journal.

“Strategically, this would be a sound acquisition for Salesforce, as it would add serious direct exposure to collaboration and the remote work movement, large and rapidly growing markets that the company indirectly participates in, and would allow for yet another connection between Salesforce and its customers. We stress that no deal has been formally announced, so obviously, there are no deal metrics to consider,” said Dan Romanoff, equity analyst Morningstar.

“The reports have sent shares of Slack up more than 20% intraday while weighing on Salesforce shares by approximately 3%. With Slack’s market cap at $21 billion now, the deal would likely be the largest ever for Salesforce in terms of dollars. However, it would be smaller than Salesforces’ June 2019 Tableau deal announcement in terms of percentage of market cap, with Slack currently at 9% of Salesforce’s market cap, compared with 13% for the Tableau deal. For now, we are maintaining our fair value estimates of $253 for Salesforce and $20 for Slack,” Morningstar’s Romanoff.

Salesforce.com’s shares closed 5.37% lower at $246.82 on Wednesday. However, the stock is up over 50% so far this year.

Salesforce.com Stock Price Forecast

Sixteen equity analysts forecast the average price in 12 months at $292.20 with a high forecast of $325.00 and a low forecast of $234.00. The average price target represents an 18.39% increase from the last price of $246.82. From those 16 analysts, 14 rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $275 with a high of $332 under a bull-case scenario and $187 under the worst-case scenario. The firm currently has an “Equal-weight” rating on the enterprise cloud computing solutions leader’s stock.

“CRM is down 5% after Wall Street Journal reported Salesforce is in advanced talks to buy Slack. At the current $23B valuations (21x EV/ NTM sales), the deal would be CRM’s largest yet and likely dilutive. While WORK can give CRM a boost in collaboration tools, MSFT competition remains a key risk,” said Keith Weiss, equity analyst at Morgan Stanley.

Several other analysts have also upgraded their stock outlook. Salesforce.com has been given a $275 price target by The Goldman Sachs Group. The brokerage currently has a “buy” rating on the CRM provider’s stock. Bernstein restated a “neutral” rating and set a $234 price target. Barclays boosted their price target to $315 from $264 and gave the stock an “overweight” rating.

Analyst Comments

“While Salesforce.com (CRM) remains one of our best secularly positioned names given enterprise IT spend prioritized towards digital transformation, we see current valuation reflective of long-term share gains within an estimated $175 billion TAM over the next 4 years and >$200 billion longer-term,” said Keith Weiss, equity analyst at Morgan Stanley.

“We see total revenue nearly doubling by FY24, but at CRM’s current scale and market cap, an increasing focus on FCF and earnings is likely necessary for further price appreciation. Our Equal-weight view on CRM shares is based on our $275 PT, which is based on 30X our CY25e FCF per share of $12.07, discounted back at 8.5%,” Weiss added.

Upside and Downside Risks

Risks to Upside: Slack Connect becomes a powerful contributor to net new customer additions. Net dollar retention rate stabilizes as new COVID-19 customers begin to meaningfully expand – highlighted by Morgan Stanley.

Risks to Downside: Competition from Microsoft, which offers a similar product for free to Office 365 users; Difficulty expanding outside of the IT department; Organizations defer to a bundled alternative (MSFT Teams, Google Workspace) in a weaker macro.