Salesforce could face lower demand as companies put IT projects on hold because of the coronavirus, analyst says

Kimberly White / Stringer

• Wall Street equity firm Wedbush took Salesforce off its "Best Ideas List" and lowered its price target to $184 from $217, blaming slowing demand for the software due to economic uncertainty caused by the coronavirus pandemic.
• Wedbush analyst Steve Koenig said companies are looking to pause or delay IT spending and cut software costs.
• Salesforce's "near term is a little cloudy," but Koenig still expects it to do well long term.
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While most industry watchers expect cloud software companies to weather a recession better than other industries, analysts warn that Salesforce could still face a short term impact.

Wall Street equity firm Wedbush lowered its Salesforce price target to $184 from $217 and took the company off its "Best Ideas List," citing the expectation that companies are pausing their IT spend right now due to economic uncertainty caused by the coronavirus pandemic.

The shaky market will make companies rethink spending decisions in the short term, said Wedbush analyst Steve Koenig, which could impede adoption of Salesforce's cloud-based customer relationship management tools.

"In the enterprise market, among large customers, these CRM digital transformation initiatives are still very high priority," he told Business Insider, "But decisions to actually spend on them or go to the next phase or initiate them are getting delayed or are at imminent risk of getting delayed."

Meanwhile, Koenig said his team has heard from Salesforce partners and consultants, who resell Salesforce software, that as smaller companies look to renew their software contracts, they're looking to cut spending costs.

While this slowdown in spending on IT modernization is not specific to Salesforce - many other software vendors will also be affected - Koenig said Salesforce is the one of the biggest software vendors that addresses digital transformation needs. In general, customer relationship tools, like Salesforce, could also be even more vulnerable to impact, too.

"While spending delays will likely affect application software generally, vendors whose value propositions are primarily oriented to revenue generation (as opposed to cost control, agility/ risk) could be relatively more at risk," he wrote in a research note. "Also, software decisions that require significant implementation commitments (e.g. large projects with system integrators) are likely more at risk."

Still, Wedbush thinks that Salesforce is poised to do well in the long term. The firm maintained its "outperform" rating on the company's stock, meaning it expects Salesforce to produce higher returns than the rest of the market.

Salesforce tends to sign long, multi-year contracts with its large customers, so it can depend on that recurring revenue even as money gets tight for smaller customers. And current uncertainty aside, Salesforce has a large market opportunity in general, Koenig said, and its $15.7 billion acquisition of Tableau late last year made that opportunity even wider. Once things return to normal and companies are less worried about spending, he expects Salesforce to get back up to speed quickly.

"It looks very promising, and so we think it has the means to continue to do well and get back to solid growth," Koenig said, "But the near term is a little cloudy."

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