Why Salesforce Stock Slumped on Tuesday
Key Points
It's apparent that customers are prioritizing capex on hardware these days, rather than the software solutions provided by the likes of Salesforce.
Much of this is due to rising asset prices in the current, vast AI build-out.
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Stock market players were clearly uninterested in pursuing a relationship with customer relationship management (CRM) software king Salesforce (NYSE: CRM) on Tuesday. The veteran company's shares slid by more than 2% that trading session, as they were swept up in a broader rout of long-standing software companies.
Softness in software
This general bearishness can't be blamed directly on Salesforce. Rather, it can be tracked to the latest news from software titan International Business Machines. That company issued a preliminary quarterly earnings report Tuesday morning; both it and its shareholders probably now wish it hadn't.
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That's because IBM's projections for revenue and profitability indicate both relatively weak growth and a pair of misses of analyst estimates. For the record, it's expecting only a 1% year-over-year bump in revenue to slightly over $17 billion, and a 5% rise in net income not under generally accepted accounting principles (GAAP) to $2.27 per share.
What made this really sting and helped ignite that software segment rout was IBM CEO Arvind Krishna's reasoning for the weaker-than-expected figures. Krishna spoke of notable shifts among clients in their technology spending, from software to hardware items such as servers and storage.
That's hardly surprising, given the anticipated price increases due to supply constraints "thanks" to the intense build-out of artificial intelligence (AI) technology.
A potentially strong headwind
While this is understandable, it isn't very comforting to investors in software stocks -- even those who have demonstrated long-term strength, like Salesforce. As bearish for the segment as it is, Krishna's take on the current customer trend feels accurate and realistic.
As it's hard to predict when those looming price increases might subside -- or even if they do, in the most extreme case -- I'd tread lightly around software stocks these days. I've always liked Salesforce as a business, but the trend just isn't its friend at the moment.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines and Salesforce. The Motley Fool has a disclosure policy.
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