During a weak month for tech stocks, investors were displeased with reports of a large acquisition.
Shares of Salesforce (CRM 0.65%) fell 10.7% last month, according to data from S&P Global Market Intelligence. Unfavorable market conditions combined with unwelcome acquisition news to drive the stock lower in April.
Salesforce news was light in April
Salesforce investors didn’t have any transformative financial data to process last month. It’s between quarterly earnings publications, and there weren’t any meaningful interim reports during the period.
Image source: Getty Images.
There were reports that Salesforce is nearing an acquisition of Informatica, which provides AI-enabled cloud data management software. Investors didn’t seem thrilled with the proposed $11 billion deal. There have been concerns that acquisitions are distracting Salesforce from maximizing the performance of its core business. Spreading itself too thin could dilute its product quality and competitive strength. In March, the company disbanded a mergers and acquisitions committee to appease activist investors who want to see more focus on existing products. The Informatica news eliminated much of that goodwill.
An $11 billion acquisition would be financed by some combination of:
- Diluting existing shareholders
- Significantly drawing down the company’s current liquid assets
- Debt issuance.
These are all standard financing activities, but they call attention to the importance of capital stewardship. Investors seem skeptical that the company will realize sufficient value from the acquisition to justify its financing. That raises concerns about Salesforce’s leadership.
Capital market conditions made everything worse
The Informatica reports weren’t meaningful enough to explain an 11% sell-off. Stock market conditions also played a role.
Encouraging employment data and unexpectedly high inflation made inventors question their expectations for the Federal Reserve’s next big move. The central bank is unlikely to reverse course unless inflation is controlled, especially if the economy keeps growing. April’s economic data suggested that an interest rate cut could be further away than investors had hoped, which is bad news for growth stocks. High interest rates result in lower demand for riskier assets, such as tech stocks with high growth rates and above-average valuation ratios.
That effect was on display in April. The Invesco QQQ Trust (QQQ -0.06%) dropped more than 5%. Salesforce stock displayed a similar pattern, suggesting a shared driver. Its larger drop relative to the Nasdaq can be attributed to its beta of 1.2 and the unwelcome acquisition news.
CRM data by YCharts
The move lower resulted in cheaper valuation ratios for the stock. Forward P/E dropped below 28, having started the month at nearly 31. A similar drop occurred relative to free cash flow and forecast sales.
CRM PE Ratio (Forward) data by YCharts
Lower valuation relative to those important fundamental metrics reveals an important driver of the stock’s performance in April. Salesforce’s drop was more attributable to market conditions, rather than deteriorating expectations for the company’s performance. Volatility should be part of this story moving forward, but the stock just got materially cheaper for bullish long-term investors.
Ryan Downie has positions in Salesforce. The Motley Fool has positions in and recommends Salesforce. The Motley Fool has a disclosure policy.