A new hedge fund has joined the growing list of activist investors owning a stake in the customer relationship management software Salesforce, this time is Third Point – a US-based investment fund headed by Daniel Loeb that manages more than $15 billion in assets for its customers.
The news was reported by the Wall Street Journal yesterday but details about the size of the investment made by Loeb’s firm were not revealed. Earlier this year, Elliott Management, another investment fund famous for its activism, purchased a stake in the software company founded by Marc Benioff that is worth billions.
“We look forward to working constructively with Salesforce to realize the value befitting a company of its stature”, commented Jesse Cohn, the managing partner of Elliott in a statement sent to Reuters.
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Other activist hedge funds that already own a piece of the firm include Capital Partners, ValueAct, and Starboard Value. Three new directors have been added to Salesforce’s Board including the CEO of ValueAct, Mason Morfit.
“Salesforce is one of the most important software companies in the world, driving digital transformations across the global economy. We have enjoyed working with Marc and the team and look forward to helping them deliver profitable growth and shareholder returns”, Morfit commented in a statement published by the San Francisco-based tech company on 27 January when the appointments were announced.
These activist investors will likely put pressure on the leadership team to make the company a profitable endeavor as Salesforce’s growth has not been translated into direct benefits to shareholders.
Salesforce is the Leading CRM Company but its Profitability Does Not Reflect That
Salesforce was ranked #1 CRM software in the world for the ninth consecutive year according to International Data Corporation (IDC). According to IDC’s research, the company has a 22.9% market share globally in the CRM market. Its closest rival is Microsoft (MSFT) with a 5.8% share.
However, the company has not managed to turn its sales into profitability. For the full 2023 fiscal year, Salesforce expects to generate positive GAAP operating margins of just 3.8%. This is quite a low figure for a software company as these businesses typically have high gross margins and limited operating expenditures.
In the case of Salesforce, gross margins stand above 70%, which is the usual scenario for a software company. however, operating expenses as a percentage of sales typically exceed that figure, primarily due to the company’s elevated marketing expenditures, which account for 40% or more of its sales in most quarters.
If Salesforce manages to trim its operating expenses without negatively affecting its sales, the company would be in a much better position to benefit shareholders via stock buybacks or even dividends.
Activist Investor Reveals Why Salesforce Stock Has Performed Poorly Lately
One of Salesforce’s activist investors, Starboard Value, made its intentions clear in a presentation shared at the C4K Conference in October last year. During the event, the investment fund emphasized that shareholders have not been rewarded in the form of higher equity values despite Salesforce’s stellar growth.
Starboard pointed out that the stock has underperformed its most relevant benchmarks such as the S&P 500 and the tech-heavy Nasdaq 100 index in the three years that ended on October 2022.
They believe that the market is assigning a lower valuation multiple to Salesforce due to the company’s inability to turn a profit despite its high gross margins and incredible sales growth.
“As growth has slowed, the company has not yet produced margins expected from its leadership position” the investment fund asserted in the presentation.
It further added: “We appreciate the company’s commitment to a firm margin target, inclusive of potential M&A headwinds, and we continue to believe there is significant additional opportunity to expand margins beyond 25%.
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