Amid a rough session for the major equity indices, Salesforce (NYSE:CRM) brought no relief, declining more than 3% on Wednesday. Investors digested yesterday’s announcement that the cloud-based software company cut hundreds of workers from its sales team. The move implied that CRM stock suffers from severe macroeconomic headwinds, sending investors rushing for the exits.
According to a Bloomberg report, the job cuts centered on the company’s efforts to improve profitability while facing slowing demand for its software products in a choppy economy. “Our sales performance process drives accountability. Unfortunately, that can lead to some leaving the business, and we support them through their transition,” a Salesforce spokesperson said Tuesday in a statement.
It’s not a great look for the company, likely contributing to the red ink in CRM stock. Per Bloomberg, Salesforce “almost tripled its workforce in the past five years, in large part through dozens of acquisitions.” As of July 31, it reported 78,634 employees. But with macroeconomic conditions changing, primarily stemming from the Federal Reserve’s hawkish monetary policy, the paradigm shifted.
“After years of focusing on revenue growth, the company has pivoted and turned its attention to a new profit margin target of 25% by 2026,” stated the news agency. As well, it reported that activist investor Starboard Value stated Salesforce was “falling behind its peers due to issues with translating growth into profitability.”
CRM Stock Faces a Difficult Road Ahead
Interestingly, Protocol reported earlier on Salesforce’s job cuts, stating that they could impact up to 2,500 employees, per CNBC. At the moment, Salesforce declined to comment on any future cuts. However, based on the Protocol report, if further cuts materialize, they may occur before the Thanksgiving holiday. That’s not exactly the news stakeholders of CRM stock want to hear.
While layoffs sometimes spark upside movements in affected securities due to increased profitability expectations, the present backdrop for CRM stock imposes great fear. For one thing, Salesforce isn’t alone in announcing job cuts. For instance, tech peers such as Amazon (NASDAQ:AMZN) and Twitter stated that they will reduce headcount to varying degrees.
Just as significantly, if not more so, the monetary environment appears poised to do a 180. In the trailing five years since September 2022, the real M2 money stock expanded over 30%. Put another way, money was “cheap” (or inflationary), so it incentivized business growth. However, in the trailing year, M2 declined over 5%, making money “expensive” (deflationary).
Should the Fed continue its hawkish pivot, liquidity in the monetary system will likely shrink. That would put CRM stock and its tech ilk in a rough spotlight. Essentially, Salesforce must aggressively pursue profitability over growth. Unfortunately, the company isn’t geared that way (biased more toward growth than profitability), meaning that further cuts may be on the horizon.
With so many uncertainties, shareholders may decide to further reduce exposure. Since the start of the year, CRM stock lost about 44% in equity value.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
