The Ratings Game: Salesforce’s stock closes down more than 8% as Wall Street questions necessity of Slack purchase

Late Tuesday, Salesforce CRM, -8.52% unleashed a fire hose of news with the confirmation of its plan to acquire Slack Technologies Inc. WORK, -2.57% for nearly $28 billion in stock and cash, quarterly results that topped Wall Street estimates, and a changing of the guard in its financial chief’s office.

The company’s stock fell nearly 11% at one point Wednesday, and closed down by 8.5% at $222.75, its worst one-day performance since March 16.

Salesforce’s stock was also the worst-performing component Wednesday on the Dow Jones Industrial Average DJIA, +0.20%, which Salesforce joined three months ago, one of only eight stocks ending the day in the red as the index rose 0.2%. That’s in contrast to a quarter ago when Salesforce’s earnings and outlook produced the best one-day stock gain in the company’s history.

In a Wednesday note, Citi Research analyst Walter Pritchard downgraded Salesforce to a neutral rating and lowered his price target to $250 from $300, and questioned whether the deal was the right approach to address the company’s competitive issues with Microsoft Corp. MSFT, -0.38%.

“We aren’t fans of the Slack deal,” Pritchard said. “We don’t think CRM needed to buy this asset, especially with already high customer overlap and the landscape in this space where MSFT Teams is becoming ubiquitous.”

On Tuesday’s call, Salesforce Chairman and Chief Executive Marc Benioff was asked why the company felt the need to pay $28 billion for Slack rather than form a closer partnership with business-communications company. Benioff pointed to the success of the company’s recent multibillion-dollar acquisitions — Tableau Software in 2019 and Mulesoft in 2018 — and its “ability to integrate companies, to make one plus one equal three.”

“While we’ve liked the durable growth driver here favorable front-office market trends and multi-product SaaS, the Slack acquisition stretches our conviction,” Citi’s Pritchard said. “History suggests that the stock has had challenges with multiple de-ratings after large acquisitions and we expect this deal will make this more likely.”

Read: Salesforce’s deal for Slack creates a bigger threat to Microsoft

Raymond James analyst Brian Peterson, who has a strong buy rating on Salesforce and raised his share-price target to $280 from $255, even expressed some trepidation.

In a note entitled, “Cut Them Some Slack, but M&A Leaves More Questions Than Answers,” Peterson lavished praise upon Salesforce’s Benioff for building a $20 billion–plus software business, but followed that up with a proverbial “that said …” caveat.

“That said, we’re not clear on how CRM’s ownership of Slack is necessary, and previous indications of a more valuation sensitive approach to M&A didn’t prove accurate,” Peterson said, hoping for more clarification for Salesforce’s decision to buy over the coming weeks.

Wedbush analyst Daniel Ives, who has an outperform rating and a $300 price target on the stock, wondered what changed Benioff’s mind from three months ago, when the CEO told analysts, “I think that for a company like Salesforce, we don’t really see an M&A environment.”

“Benioff talked down the prospects of M&A three months ago and here we are CRM is doing its largest deal ever, the Street is left a bit frustrated and we believe the stock will be in the penalty box/range bound until investors start to get more comfort with the rationale and cross-selling potential around this deal,” Ives said.

Mizuho analyst Gregg Moskowitz, who has a buy rating and a price target of $275, said its “uncertain” how well Salesforce can make money on Slack given the higher-than-expected price tag.

“We don’t yet know how well CRM can truly monetize this asset in the future, especially given the formidable presence of Microsoft Teams,” Moskowitz said. The analyst also has a buy rating on Microsoft.

“Net, we’re confident CRM will drive legitimate synergies with WORK, although we’re not quite as bullish on this acquisition as we were with MuleSoft, or Tableau,” Moskowitz concluded.

Of the 44 analysts who cover Salesforce, 36 have buy ratings on the stock, while seven have hold ratings, and one has a sell rating. Among those six analysts raised their price targets on the stock, while three reduced theirs, resulting in an average target price of $278.48, according to FactSet data.

For the year, Salesforce’s stock is up 36%, while the First Trust Cloud Computing ETF SKYY, +0.05% is up 48%, the Dow is up 4.7%, the S&P 500 index SPX, +0.17% is up 14%, and the tech-heavy Nasdaq Composite Index COMP, -0.04% is up 38%.