Market Snapshot
briefing.com
| Dow | 34435.63 | -157.96 | (-0.46%) | | Nasdaq | 11440.23 | +32.38 | (0.28%) | | SP 500 | 4082.47 | +2.16 | (0.05%) | | 10-yr Note | +34/32 | 3.53 |
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| | NYSE | Adv 1681 | Dec 1349 | Vol 947 mln | | Nasdaq | Adv 2405 | Dec 2112 | Vol 5.0 bln |
Industry Watch
| Strong: Communication Services, Health Care, Information Technology |
| | Weak: Consumer Staples, Financials, Energy, Real Estate, Consumer Discretionary |
Moving the Market
-- Improvement in inflation readings, particularly the core-PCE Price Index given Fed Chair Powell's emphasis that the Fed's policy tools are better designed for working on core inflation
-- S&P 500 getting rejected at 4,100, but finding support at its 200-day moving average (4,048)
-- Falling Treasury yields and weakening dollar
-- Downside leadership from some lagging mega cap stocks
-- ISM Manufacturing Index falling into contractionary territory (i.e. sub-50 reading)
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Closing Summary
01-Dec-22 16:25 ET
Dow -193.24 at 34400.35, Nasdaq +14.45 at 11422.30, S&P -3.32 at 4076.99
[BRIEFING.COM] Following yesterday's huge rally, there wasn't much up or down price action for the stock market after some mild turbulence coming out of the gate. Nonetheless, it was a pretty good day for the bulls since sellers were reluctant to undo yesterday's gains. There might have also been an element of trepidation in today's trade as participants awaited the November Employment Situation Report tomorrow at 8:30 a.m. ET.
Market participants were contending with the idea that they might have overreacted yesterday and that the growth environment is going to be challenging given the past rate hikes and the rate hikes that are yet to come. A 49.0% reading for the November ISM Manufacturing Index, which is the first sub-50% reading (the dividing line between expansion and contraction) since May 2020, also took some steam out of the upside momentum.
The 2-yr note yield fell 15 basis points to 4.23% and the 10-yr note yield fell 17 basis points to 3.53%.
Strikingly, stocks did not respond more favorably to the big drop in market rates today. There could be some reservations about the growth signaling from the precipitous drop in Treasury yields in play there. A sharp slowdown in economic activity -- or possibly a recession -- is not a plus for earnings growth prospects. Accordingly, some underlying valuation angst may have acted as a restraint for the stock market today.
The main indices moved higher initially after the latest readings for the PCE and core-PCE Price Indexes showed a welcome moderation on a year-over-year basis. The upside momentum ran into a wall as the S&P 500 tested the 4,100 level and participants digested the ISM release.
Starting around 10:30 a.m. ET, the stock market clung to a narrow trading range after the S&P 500 tested a key technical level (its 200-day moving average at 4,048). That line of support held, but it will be a key area to watch in coming days. Market bulls will want to see it hold up and preferably with the support of heavy volume.
Due to the ugly showing from Salesforce (CRM 147.00, -13.25, -8.3%), and a handful of other components, the Dow Jones Industrial Average (-0.6%) trailed its peers. Salesforce reported earnings and announced that Bret Taylor will step down as co-CEO at the end of January.
Only three of the 11 S&P 500 sectors were able to log a gain today, but none of the sectors moved more than 0.7% in either direction. Communication services (+0.3%) and health care (+0.2%) led the outperformers while financials (-0.7%) and consumer staples (-0.5%) brought up the rear.
- Dow Jones Industrial Average: -5.4% YTD
- S&P Midcap 400: -9.5% YTD
- Russell 2000: -16.2% YTD
- S&P 500: -14.5% YTD
- Nasdaq Composite: -26.6% YTD
Reviewing today's economic data:
- Personal income increased 0.7% month-over-month in October (Briefing.com consensus 0.4%) and personal spending jumped 0.8% (Briefing.com consensus 0.8%). The PCE Price Index was up 0.3% month-over-month (Briefing.com consensus 0.4%) and the core-PCE Price Index, which excludes food and energy, increased 0.2% (Briefing.com consensus 0.2%).
- The key takeaway from the report was the improvement in the inflation readings, particularly the core-PCE Price Index given Fed Chair Powell's emphasis that the Fed's policy tools are better designed for working on core inflation.
- Initial jobless claims for the week ending November 26 decreased by 16,000 to 225,000 (Briefing.com consensus 238,000) while continuing claims for the week ending November 19 increased by 57,000 to 1.608 million.
- The key takeaway from the report is that the low level of initial claims remains indicative of an otherwise solid labor market but, importantly, it also continues to favor a potentially softer landing for the economy.
- The final IHS Markit Manufacturing PMI reading for November came in at 47.7 after a 47.6 reading in October.
- The November ISM Manufacturing Index dropped to 49.0% (Briefing.com consensus 49.8%) from 50.2% in October. The dividing line between expansion and contraction is 50.0%, so the sub-50.0% reading for November reflects a contraction in manufacturing activity. The ISM for November hit its lowest level since May 2020, breaking a string of 29 months of expansion.
- The key takeaway from the report is that manufacturing activity contracted for the first time since May 2020, demonstrating that the cumulative effect of rate hikes around the globe are adversely impacting demand while at the same time curtailing inflation pressures.
- Total construction spending decreased 0.3% month-over-month in October (Briefing.com consensus -0.2%) following a downwardly revised 0.1% increase (from 0.2%) in September. Total private construction declined 0.5% month-over-month while total public construction spending increased 0.6%. On a year-over-year basis, total construction spending was up 9.2%.
- The key takeaway from the report is that private construction spending was weak on the residential and nonresidential side of things, presumably due to rising interest rates that are making construction projects more expensive to finance at a time when broader economic activity is slowing due in part to the rising interest rates.
- Weekly EIA Natural Gas Inventories showed a draw of 81 bcf versus a a draw of 80 bcf last week.
Looking ahead to Friday, market participants will receive the November Jobs Report, which includes: Nonfarm Payrolls (Briefing.com consensus 200,000; prior 261,000), Nonfarm Private Payrolls (Briefing.com consensus 200,000; prior 233,000), Average Hourly Earnings (Briefing.com consensus 0.3%; prior 0.4%), Unemployment Rate (Briefing.com consensus 3.7%; prior 3.7%), Average Workweek (Briefing.com consensus 34.5; prior 34.5)
All eyes on employment situation
01-Dec-22 15:25 ET
Dow -206.73 at 34386.86, Nasdaq +10.32 at 11418.17, S&P -5.03 at 4075.28
[BRIEFING.COM] There hasn't been much change at the index level today, but all in all it still qualifies as a pretty good day for the bulls. Granted buyers have been a reluctant bunch, but, more to the point, so have sellers. The major indices have retained the bulk of yesterday's large gains while the Nasdaq has padded its gains.
The underperformance of the price-weighted Dow Jones Industrial Average is due predominately to losses in four components: Salesforce (CRM 145.96, +14.29, +8.9%), UnitedHealth (UNH 537.66, -10.10, -1.8%), Boeing (BA 175.87, -3.01, -1.7%), and JPMorgan Chase (JPM 136.58, -1.60, -1.2%).
This week has featured a slew of important economic data, but Friday will feature the most closely-watched report of all: the Employment Situation Report.
With the Fed eager to see some moderation in wage growth, the focal point of that report will be the average hourly earnings number. The Briefing.com consensus estimate for average hourly earnings growth is 0.3%. in October, average hourly earnings were up 0.4% month-over-month and up 4.7% year-over-year.
The November Employment Situation Report will be released Friday at 8:30 a.m. ET.
Treasuries reman excitable
01-Dec-22 15:00 ET
Dow -157.96 at 34435.63, Nasdaq +32.38 at 11440.23, S&P +2.16 at 4082.47
[BRIEFING.COM] With the exception of a little seesaw action early, there hasn't been much trading excitement in the stock market today. The major indices have been confined to tight trading ranges for the better part of the past four hours.
One area that has remained excitable following Fed Chair Powell's speech yesterday has been the Treasury market. The 2-yr note yield is down 15 basis points to 4.30% (it stood at 4.55% at yesterday's high) and the 10-yr note yield is down 17 basis points to 3.54% (it stood at 3.80% at yesterday's high).
Support factors today include continued short-covering activity along with some pleasing PCE inflation data in the October Personal Income and Spending Report and the first sub-50% reading for the ISM Manufacturing Index since May 2020 (50.0% is the dividing line between expansion and contraction).
Strikingly, stocks have not responded more favorably to the big drop in market rates today. There could be a bit of exhaustion after yesterday's rally effort, but there could also be some reservations about the growth signaling from the precipitous drop in Treasury yields. A sharp slowdown in economic activity -- or possibly a recession -- is not a plus for earnings growth prospects. Accordingly, some underlying valuation angst could be acting as a restraint for the stock market today.
SPLK, FIVE, OKTA among biggest winners; COST, DG among biggest laggards
01-Dec-22 14:25 ET
Dow -192.36 at 34401.23, Nasdaq +17.08 at 11424.93, S&P -1.90 at 4078.41
[BRIEFING.COM] The main indices continue to chop around a fairly narrow range. The Nasdaq Composite is popping in and out of positive territory, up 0.1% currently.
On an individual basis, Splunk (SPLK 89.26, +11.78, +15.2%), Five Below (FIVE 185.51, +24.73, +15.4%), and Okta (OKTA 66.81, +13.31, +25.1%) are among the biggest winners today after they all reported quarterly results.
Retailers Costco (COST 503.77, -35.47, -6.8%) and Dollar General (DG 235.00, -20.72, -8.1%) are some of the top laggards after the former reported November comparable sales while the latter reported worse-than-expected earnings and issued below-consensus Q4 EPS guidance.
Growth outpacing value
01-Dec-22 14:05 ET
Dow -288.96 at 34304.63, Nasdaq -7.52 at 11400.33, S&P -12.05 at 4068.26
[BRIEFING.COM] Things are little changed in the last half hour.
Growth stocks have a slight edge over value stocks. The Russell 3000 Growth Index is flat while the Russell 3000 Value Index sports a 0.2% loss.
At the same time, mega cap stocks have pared earlier losses. The Vanguard Mega Cap Growth ETF (MGK) is flat while the S&P 500 is down 0.3%.
Page One
Last Updated: 01-Dec-22 09:08 ET | Archive
A follow-through test presents itself
We will assume that readers know by now that yesterday turned out to be a great day for the stock market -- and the Treasury market for that matter. It was a great day because Fed Chair Powell reportedly did not tighten the screws of his monetary policy position any further.
Some will contend that he actually loosened the screws a bit. We would argue that he showed up with his toolbox at the Brookings Institution but never took a tool out of the box. The market, waiting with bated breath for the Fed Chair to lower the hammer, let out a huge sigh of relief when he did not.
The market's worst fear then was not realized and that became a rally catalyst that ultimately triggered a huge short-covering rally and some chasing action as the S&P 500 broke above key resistance at its 200-day moving average.
It was an overreaction in our estimation because the Fed Chair repeated just about everything he said following the November FOMC meeting, but in splitting linguistic hairs, some added attention was paid to his summation that "the ultimate level of interest rates will be somewhat (emphasis our own) higher than previously expected" versus the original contention that "the ultimate level of interest rates will be higher than previously expected."
Apparently, somewhat was some kind of word. It didn't launch a thousand ships, but it launched a rally in the Dow Jones Industrial Average that culminated with a finish nearly 1,000 points off yesterday's low. The other indices made some similarly, super-charged rebound efforts. The Nasdaq closed up 4.4% and the S&P 500 gained 3.1%.
Today, therefore, presents a new test. It is the follow-through test. At the moment, the stock and bond markets are passing the test.
The S&P 500 futures are up 15 points and are trading 0.3% above fair value, the Nasdaq 100 futures are up 32 points and are trading 0.2% above fair value, and the Dow Jones Industrial Average futures are up 42 points and are trading in-line with fair value. The 2-yr note yield, meanwhile, is down five basis points to 4.33% and the 10-yr note yield is down 11 basis points to 3.59%. The U.S. Dollar Index has dropped 0.8% to 105.14.
The markets are pricing in a peak inflation/peak policy narrative. Granted the fed funds rate is still going higher from current levels, but market participants can smell a peak in the policy rate around 5.00% in the first half of next year. If the FOMC elects to raise the target range by 50 basis points at the December meeting, the target range will be 4.25-4.50%.
The October Personal Income and Spending Report favored the "smaller" rate hike at the same time it favored a soft landing possibility.
Briefly, personal income increased 0.7% month-over-month in October (Briefing.com consensus 0.4%) and personal spending jumped 0.8% (Briefing.com consensus 0.8%). The PCE Price Index was up 0.3% month-over-month (Briefing.com consensus 0.4%) and the core-PCE Price Index, which excludes food and energy, increased 0.2% (Briefing.com consensus 0.2%).
On a year-over-year basis, the PCE Price Index was up 6.0%, versus 6.3% in September, and the core-PCE Price Index was up 5.0%, versus 5.2% in September.
The key takeaway from the report was the improvement in the inflation readings, particularly the core-PCE Price Index given Fed Chair Powell's emphasis that the Fed's policy tools are better designed for working on core inflation.
Separately, initial jobless claims for the week ending November 26 decreased by 16,000 to 225,000 (Briefing.com consensus 238,000) while continuing claims for the week ending November 19 increased by 57,000 to 1.608 million.
The key takeaway from the report is that the low level of initial claims remains indicative of an otherwise solid labor market but, importantly, it also continues to favor a potentially softer landing for the economy.
The November ISM Manufacturing Index (Briefing.com consensus 49.8%; prior 50.2%) will be another focal point when it is released at 10:00 a.m. ET.
The focal point for now, however, is the behavior of the market itself. Stocks are holding up reasonably well despite a 7.7% decline in Dow component Salesforce (CRM) following its earnings report, because stocks are happy with the thought that the Fed is about to take a softer touch with its toolbox and will perhaps soon stop hammering home the rate hikes altogether.
-- Patrick J. O'Hare, Briefing.com
Elastic gets pulled lower as slowdown in SMB customer base weighs on revenue outlook (ESTC)
Elastic (ESTC) had managed to withstand the macro-related adversities that have impacted many cloud software companies over the past few months, but those difficulties finally caught up to the company in 2Q23. While the quarter started off on a strong note, ESTC began to see the well-documented budget tightening from its customers in October, especially from the SMB crowd.
Compounding the problem, foreign exchange impacts are causing the sales cycle to lengthen in countries where the strengthening dollar has created adverse conditions. As a result, the company issued downside Q3 revenue guidance and cut its FY23 revenue outlook, sending its shares spiraling lower today.
The headline EPS and revenue numbers for Q2, both of which exceeded expectations, would suggest that its business as usual for ESTC. However, a pair of other key metrics tell a different story.
- While still strong, ESTC's net expansion rate dipped to 125% in Q2 from just under 130% in Q1. This decline reflects a slight moderation or pause in spending from some of the company's existing customers.
- The total number of customer additions slowed in Q3 relative to Q2. Specifically, ESTC added 400 total subscription customers this quarter, compared to 700 last quarter. The slowdown is entirely due to the softness in the SMB customer segment.
Looking beyond the SMB troubles, there were plenty of positives from the earnings report.
- Demand from the larger customer segment remained resilient, as illustrated by ESTC adding about 80 customers with ACV over $10,000, and 40 customers with ACV north of $100,000. Both of those figures are consistent with the prior quarter. Relatedly, revenue in the hyperscaler space was robust again, more than doubling on a yr/yr basis, with strength seen in Amazon (AMZN) Web Services, Microsoft (MSFT) Azure, and Google (GOOG) Cloud.
- The company continues to take a balanced approach in terms of driving growth and improving profitability. In Q2, adjusted operating margin reached nearly 2%, easily beating its prior guidance of -0.6% to -0.2%. CEO Ash Kulkarni credits the operating leverage that's inherent in the business for the margin outperformance.
- With business conditions becoming more challenging, ESTC plans to accelerate its profitability aspirations, while optimizing its investments in strategic areas. To that end, the company also announced a plan to reduce its workforce by 13% and to implement more automated self-service capabilities for its SMB customers. The company believes that these initiatives will put it on a path to achieve a Non-GAAP operating margin of 10% in FY24.
- A major growth catalyst for ESTC is the emergence of Elastic Cloud, which is the company's family of hosted offerings. In Q2, Elastic Cloud revenue grew by a healthy 50% yr/yr to $103.2 mln, accounting for nearly 40% of total revenue. In the year-ago period, Elastic Cloud represented about 34% of total revenue.
While the soft revenue guidance is disappointing, we believe that the story remains mostly positive for ESTC in the big picture. Demand from the company's larger customer base is still healthy and it's making significant strides on the bottom line. With these thoughts in mind, it's not overly surprising that the stock has bounced back and is well off its lows for the day.
La-Z-Boy slides on cautionary remarks regarding near-term macroeconomic uncertainty (LZB)
La-Z-Boy (LZB -5%) cannot recline today despite posting solid upside on its top and bottom lines in Q2 (Oct), as its cautious tone regarding the near-term weigh on shares. We were nervous heading into LZB's earnings report after some red flags were flashed by peer Williams-Sonoma (WSM) and furniture hardware supplier Leggett & Platt (LEG). WSM withdrew its FY24 outlook on macroeconomic fears last month, while LEG trimmed its FY22 forecast for the second-straight quarter in October, citing softening consumer demand.
- LZB did not beat around the bush, noting that near-term headwinds continued to slow its written sales momentum across the industry, requiring ongoing adjustments and better agility.
- These obstacles were apparent when drilling beyond LZB's fairly upbeat headline numbers of a double-digit earnings beat and 6.2% sales growth yr/yr to $611.33 mln. Total written sales for LZB's company-owned Retail segment fell -5%, with same-store written sales down -10%. Meanwhile, Joybird, which has been relatively strong recently, saw comps plummet in Q2, falling -27%, a reflection of similar unfavorable consumer trends, as well as adverse effects from changes in campaign execution with a key marketing partner.
- However, the changes have since been reversed, spurring meaningful improvement in ROI and yr/yr trends, with Joybird written numbers veering more in-line with the furniture industry. Still, LZB noted that it is too early to draw sweeping conclusions.
- There were still some positive developments from Q2. Lead times continued improving, edging closer to LZB's goal of shipping custom furniture within four to six weeks, which it notes is a competitive differentiator.
- LZB is also setting its sights on the long term, reducing its backlog to pre-pandemic lead times, optimizing staffing levels, and investing in technology to bolster its digital and omnichannel offerings. Meanwhile, with customers voicing their demand to view LZB furniture in person, the company is expanding and enhancing its Furniture Galleries footprint, working to open 7 new stores during FY23 and remodel another 30.
- LZB also increased its quarterly dividend by 10%, a sign of confidence in future cash flows.
Still, it is hard to look past the cautionary remarks from Q3. As WSM noted in November, it is difficult to know how long the current economic uncertainty will last, setting LZB up for heightened volaility until direction is clearer. Still, LZB is not sitting on a mountain of debt, boasting a debt ratio of around 0.5, while profitability has been steadily improving over the years. LZB also operates exclusively in North America, cushioning it from the worse economic conditions abroad.
Splunk combines solid demand with cost containment efforts to blow out estimates again (SPLK)
Despite experiencing a more cautious spending approach from its customers, Splunk (SPLK) still crushed 3Q23 top and bottom-line estimates and raised its FY23 outlook for revenue, Non-GAAP operating margin, and free cash flow. The data analytics and cybersecurity company, which is currently operating without a full-time CFO, drove its strong results through its cloud-based business transformation efforts and through robust margin expansion. On that note, SPLK's cloud gross margin increased by a whopping eight percentage points from last year to 72% this quarter.
Heading into the earnings report, there was concern that macroeconomic uncertainties were pressuring demand and causing customers to slow their cloud migrations and expansions. Recall that last quarter, CEO Gary Steele disclosed that some customers were opting for shorter-term commitments as they tightened their IT budgets. Consequently, SPLK ratcheted its FY23 Cloud ARR guidance lower to approximately $1.8 bln from $2.0 bln.
Adding to the angst, several cloud software companies have recently noted that sales cycles are lengthening and that IT deals are seeing more scrutiny from CIOs, sometimes resulting in delays and/or smaller up-front investments. A few prominent names that have cited these issues include CrowdStrike (CRWD), Palo Alto Networks (PANW), and Salesforce (CRM).
While SPLK wasn't completely spared from these challenges, as evidenced by its dollar-based net retention rate slipping a bit to 127% from 129% last quarter, the company fared much better than many had anticipated.
- Cloud ARR remained solid in Q3, increasing by 46% yr/yr to $1.62 bln as SPLK did not experience a meaningful decline in the pace of cloud expansions and migrations. Given the difficult macro environment, SPLK is still exercising some caution regarding its Cloud ARR outlook, but its guidance qualifies as better-than-feared. Specifically, the company only slightly lowered its forecast to $1.775-$1.80 bln.
- Although the resilient demand picture may be garnering the most attention, SPLK's expense management also stands out and is a major factor behind its huge EPS beat and improved FY23 guidance. For the quarter, total operating expenses decreased by 2% to $747.8 mln as the company homed in on opportunities to lower labor, travel, and real estate costs. Looking ahead, SPLK is confident that it can drive even greater cost savings, especially in regard to hiring, leading it to raise its FY23 Non-GAAP operating margin guidance to 12-13% from 8%.
Overall, demand held up quite well in Q3, particularly from SPLK's existing customers, which generated strong term license sales. Business conditions have softened across the cloud software landscape, but SPLK's cybersecurity, observability, and data analysis applications are receiving prioritization in many companies' IT budgets. Along with SPLK's heightened focus on profitability, this favorable positioning could keep this streak of huge EPS beats going, which now stands at five consecutive quarters.
Kroger sees quick profit-taking activity despite decent Q3 report; ACI regulatory hurdles loom (KR)
Kroger (KR -1%) quickly returned its gains today despite the grocery retailer's decent earnings beat in Q3 (Oct). Same-store sales growth, excluding fuel of +6.9%, also topped estimates, underpinning sustained eat-at-home trends even as dining out continues to rebound. KR also hiked its FY23 forecasts.
So why did shares quickly sell-off? Perhaps investors were hoping for more information on KR's massive $24.6 bln merger with Albertsons (ACI). CEO William McMullen only briefly touched on the acquisition, noting that talks with regulators are ongoing, and he feels confident in the previously mentioned early 2024 close. The deal is expected to face tall regualtory hurdles, which could prove a distraction, allowing competitors to pounce on KR's market share. Profit-taking could also be in the cards as shares of KR have soared since enduring a sell-the-news reaction to its merger with ACI in mid-October, climbing around 17%.
- Q3 numbers were solid across the board; adjusted EPS climbed 5% yr/yr to $0.88 on 7% sales growth to $34.2 bln. Meanwhile, first-in, first-out (FIFO) gross margins, a common method of accounting at grocery stores due to the host of products that expire with age, was nearly flat yr/yr, contracting just 5 bps despite higher cost inflation, a testament to KR's ability to traverse the current environment.
- Part KR's success can be attributed to its private labels, or "Our Brands," which boasted +10.4% comp growth in Q3. This marked the third consecutive quarter where Our Brands comps outperformed total company comps, highlighting the broad consumer shift toward more bang-for-your-buck products. A similar theme played out for many other grocery chains lately, including Walmart (WMT), whose private brand penetration in food grew around 130 bps yr/yr in OctQ.
- On a side note, although high expectations spurred an adverse reaction last quarter, KR's private label performance is a healthy sign for Costco (COST), which derives around a third of its revenue from its private labels. COST reports NovQ earnings on December 8.
- KR expects momentum to remain to close out its fiscal year. The company predicts FY23 adjusted EPS of $4.05-4.15, up from $3.95-4.05, and comps of +5.1-5.3%, up from +4.0-4.5%.
Even though it is not showing up in the stock price today, KR's Q3 numbers illustrate that at-home cooking trends have not gone anywhere, even as restaurants return to regular operating hours and traffic continues to improve. KR's results also stand out when considering that competition has only intensified, with the largest grocery retailer, WMT, commenting earlier this month that it continued to gain market share. Members-only warehouse BJ's Wholesale (BJ) also noted that it expanded its market share during OctQ.
Bottom line, KR's ACI merger may add a layer of volatility over the next year as regulatory scrutiny could stoke big swings on a day-to-day basis. However, we still see KR as a solid choice during an inflationary and rising rates environment, as these dynamics should help sustain strong eat-at-home trends.
Salesforce not a force today, stock down despite Q3 upside; co-CEO stepping down (CRM)
Salesforce (CRM -10%) is trading sharply lower following its Q3 (Oct) earnings report last night. The headline numbers were actually quite good with another double-digit EPS beat and in-line revs. Even the Q4 (Jan) guidance was solid. As we said in our preview, we had concerns about the guidance given that CRM tends to be conservative and it has posted four consecutive quarters where it has issued downside guidance for the next quarter. Revenue guidance was a bit light, but not as bad as feared.
We think two main things are driving the stock lower today despite the good results: 1) co-CEO Bret Taylor suddenly announced he will step down on January 31 to return to his entrepreneurial roots; Marc Benioff will be Chair and CEO; and 2) despite the pretty good guidance, Salesforce made some cautious comments on the call.
- CRM's flagship Sales Cloud grew 12% yr/yr and a healthy 17% in constant currency (CC), including customer wins at Bolt, Snowflake and Thermo Fisher. Service Cloud also grew 12% and 16% CC. Marketing and Commerce Clouds grew 12% and 18% CC. Multi-cloud adoption by its customers continues as customers with 5+ clouds increased ARR by over 20%. Also, 7 of its 13 industry clouds grew ARR above 50% this quarter.
- Despite the good Q3 results and solid Q4 guidance, the company did sound a note of caution on the call. Specifically, CRM had noted on its last call that it was seeing more measured customer buying behavior beginning in July, which led to elongated sales cycles, additional deal approval layers and deal compression particularly in enterprise. As Q3 progressed, CRM saw an even more challenging buying environment, driving intense customer scrutiny on every investment dollar. This behavior was most pronounced in its US and major European markets.
- Quickly on the CEO news, investors seem to be reacting negatively to the news. We think the suddenness of the announcement is spooking investors a bit. Recall it was only a year ago that the two became co-CEOs. Taylor is known for his impressive technical background as he was also a co-creator of Google Maps and CTO of Facebook, credited with the invention of the "Like" button. He says he wants to return to his entrepreneurial roots, but investors' minds tend to wonder why he would leave. Regardless, it is a loss for Salesforce.
Overall, Salesforce posted solid results and guidance. The sudden change at the CEO level was a surprise and is likely contributing to today's weakness. Also, CRM's comments about cautious buying behavior by customers is a concern. However, it is just the latest in a series of weak results/comments from cloud-related companies this earnings cycle, most notably from Amazon's AWS and Microsoft's Azure, among others. Just this week, NTAP singled out its cloud business as a being impacted by increased budget scrutiny. This is definitely a bit of a "dark cloud" over cloud computing budgets right now.
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